longer, healthier, happier lives

140
Longer, healthier, happier lives bupa.com/annualreport Annual Report 2015

Upload: tranliem

Post on 11-Jan-2017

236 views

Category:

Documents


6 download

TRANSCRIPT

Page 1: Longer, healthier, happier lives

Longer, healthier, happier lives

bupa.com/annualreport

Annual Report 2015

Page 2: Longer, healthier, happier lives

Extraord

inar

y b

usin

ess

perfo

rman

ce

people around the world

A healt

hcare partner to millions more

Peo

ple love w

orking

at Bupa

Bupa 2020 is our strategic vision outlining how we will fulfil our purpose and support millions of people to enjoy better health.

Bupa 2020

Mak

ing

qual

ityhe

althc

are

that’s right for me

Providing

accessto

adviceand

care

Tackling the toughest challenges

To find out more about Bupa’s purpose, go to: bupa.com/annualreport

Our purpose: longer, healthier, happier lives

Page 3: Longer, healthier, happier lives

A purposeful, commercial business

Our status as a private company, limited by guarantee, means we have no shareholders and are not driven by short-term profit. So we behave

commercially and focus on our customers, while taking a long-term view and

reinvesting our profit to provide more and better healthcare, fulfilling our purpose:

longer, healthier, happier lives.

To find out more about Bupa’s status, go to: bupa.com/status

Contents

Strategic ReportWe are a global business

Bupa around the world – page 2

We fund and provide healthcare and engage people in their health Our business model – page 4

Our progress this yearStatements from our Chairman and CEO

– pages 12 and 14

Key performance indicators – page 16

Market Unit performance – page 18

Financial review – page 22

Risks and uncertainties – page 26

Longer-term viability statement – page 30

Governance Governance Report – page 31

Remuneration Report – page 51

Report of the Board of Directors – page 61

Statement of Directors’ Responsibilities – page 62

Financial Statements Financial Statements – page 63

Independent Auditor’s report – page 64

Customers

32.2m 12%

Health and care engagement

160m 19%

Revenue

£9.8bn 6% CER1

1% AER2

Underlying profit3

£582.5m 2% CER

9% AER

Carbon footprint reduction

23%from our 2009 baseline

Employee engagement

71% 3%

Performance excellence

77% 2%

Leadership

71% 2%

1 Constant Exchange Rates (CER) are used to aid comparison and provide clarity on trading performance. All figures presented are CER unless otherwise stated.

2 Actual Exchange Rates.

3 See financial review page 22 for our definition of underlying profit.

Page 4: Longer, healthier, happier lives

13

10

17

6

23

20

2020

20

20

23

3

22

16

88

15

10

1313

13 24

24

7

4

We have 84,000 people who support our 32 million customers in 190 countries around the world.

Spain

2.4m insurance and provision customers

20clinics

6 hospitals

180dental centres

40care homes

3day care centres

18corporate on-sites

Chile

2.8minsurance and provision customers

33clinics*

3 hospitals

33dental centres*

UK

5.1minsurance and provision customers

51clinics*

1hospital

31dental centres*

288care homes

6retirement villages

9corporate on-sites

Bupa Global

2m insurance customers

Through Bupa Global we provide international health insurance, medical assistance and travel insurance to customers in 190 countries around the world.

Bupa around the world

Page 5: Longer, healthier, happier lives

18

18

22

12

21

5

5

19

18

1

1

1 1

1

14

Globally we run...

320 clinics*

628 dental centres*

456 care homes

98 retail centres

17 hospitals

36 optical centres

37 retirement villages

75 corporate on-sites

5Bupa Annual Report 2015

Strategic Report

Australia

6.2minsurance and provision customers

2clinics

204dental centres

36optical centres

68care homes

98retail centres

9corporate on-sites

New Zealand

24kprovision customers

7clinics

26dental centres

59care homes

31retirement villages

11

Saudi Arabia

3.7minsurance customers

India

2.5minsurance and microinsurance customers

Poland

5.3minsurance and provision customers

142clinics*

30corporate on-sites

143dental centres*

1care home

7hospitals

Hong Kong

1.3minsurance and provision customers

65clinics*

11dental centres*

9corporate on-sites

Thailand

400kinsurance customers

9

Principal Bupa offices

Local health insurance and/or healthcare provision services

Australia: Adelaide, Brisbane, Melbourne, Perth, SydneyBolivia: La Paz, Santa CruzBrazil: São PauloChile: Santiago China: Beijing, ShanghaiDenmark: CopenhagenDominican Republic: Santo DomingoEcuador: Guayaquil, QuitoEgypt: Alexandria, CairoGuatemala: Guatemala CityHong KongIndia: New DelhiMexico: Mexico City, Monterrey, PueblaNew Zealand: AucklandPanama: Panama CityPeru: LimaPoland: WarsawSaudi Arabia: Jeddah, Khobar, RiyadhSingaporeSpain: Barcelona, Bilbao, Madrid, Seville, ValenciaThailand: BangkokUAE: DubaiUK: Brighton, Leeds, London, Manchester, StainesUSA: Miami, Philadelphia

1.

2.3.4.5.6.7.

8.9.10. 11. 12.13.

14. 15.16.17.18.

19.20.

21.22.23.

24.

• This includes combined sites that offer both dental and clinic services. There are 192 of these sites across Bupa.

Page 6: Longer, healthier, happier lives

Extraordinary business

performance

people around the worldA healthcare partner to millio

ns mor

e

How we do it

Engage

ProvideFund

Our business model, combining health funding, provision and engagement, means we deliver world-class health and care.

Clinics including outpatient, diagnostic, dental, optical, primary care, and other wellness services

Consumer advocacy and campaigns on subjects including healthy lifestyles,

health system improvements and

dementia care

Partnerships with NGOs, companies and others to reach millions more people

Health and wellbeing services and tools

including telephone helplines, apps and

online tools to encourage

healthier choices

Domestic health insurance

funding quality healthcare for our customers where

they live

Aged care including specialist dementia care, retirement villages, respite care, and long-term care

Hospitals 17 around the world

International health insurance

for people who want access to

premium insurance products and

healthcare services worldwide

Other funding products

including medical subscriptions,

cash plans, travel and micro health

insurance

Growing our business to improve the health of the world

Page 7: Longer, healthier, happier lives

7Bupa Annual Report 2015

Strategic Report

Where we do it

What this means

For our people

For society Reinvestment

For customersSupporting our people to be healthier

because they work at Bupa and making a positive impact in our

communities.

Partnering to improve healthcare systems; engaging millions of people with wellness tools and information; working to make a positive impact

on the environment.

With no shareholders, we have a long-term perspective and reinvest

our profits to fulfil our purpose: longer, healthier, happier lives.

Delivering accessible, quality healthcare products and services

to meet a wide range of health and care needs.

Market context

Healthcare remains a growing market worldwide, but the sector is faced with continuous pressure to contain rising costs, particularly given the impact of the current economic environment on consumers, businesses and governments.

The rising cost of health insurance is a global trend and we are increasingly working with providers to ensure better health outcomes for customers at sustainable prices.

Care environments are shifting as hospitals are not designed to manage long-term conditions and integrated care models are emerging that combine primary and intermediate care services in new ways.

People’s health and care needs continue to evolve. Long-term conditions including heart disease, cancer, diabetes and dementia are rising due to unhealthy lifestyles and an ageing population.

We have partnered with the World Heart Federation, Union for International Cancer Control, Alzheimer’s Disease International, World Health Organization, the Non-communicable Disease Alliance and the International Telecommunications Union to work together to tackle the toughest challenges in healthcare.

Customers are increasingly looking for greater personalisation and flexibility to receive care in their chosen setting. We are investing to enhance customer experience through digital innovation, improving processes and developing new propositions.

Growing our business to improve the health of the world

Capital reinvested in 2015

£550m

Market Unit Health insurance

Other funding

products

Clinics Hospitals Aged care

Health and care

engagement

Australia and New Zealand ü ü ü – ü ü

United Kingdom ü ü ü ü ü ü

Spain and Latin America Domestic

ü ü ü ü ü ü

International Development Markets

ü ü ü ü – ü

Bupa Global ü ü – – – ü

Page 8: Longer, healthier, happier lives

We fund healthcareWe fund care through insurance, subscriptions, and other

funding products, supporting our customers to stay healthy and treating illness and injury.

1

2

3

4

5

We developWe develop and market health insurance

products in line with people’s needs

We assess riskWe assess insurance risks and use our experience and expertise to determine whether we can offer cover, and how much it will cost

We manageWe manage healthcare partners on behalf of our customers, negotiate competitive

rates with healthcare providers and quality assure both the patient experience

and health outcomes

We financeWe safeguard our financial assets and

customers’ premiums so that we are able to pay for the care our customers need

and support them through their treatment

We reinvestWe reinvest our profits into the business

to fund and provide better health and care for millions more people

International health insurance

for people who want access to

premium insurance products and

healthcare services worldwide

Other funding products

including medical subscriptions,

cash plans, travel and micro health

insurance

Domestic health insurance

funding quality healthcare for our customers where

they live

Page 9: Longer, healthier, happier lives

Experienced sailor Lola was involved in an accident while aboard her boat in Antigua. Already covered by Bupa Global, her husband Daniel called us for help.

Health insurance in Australia

Bupa is a leading health insurance provider in Australia focused on providing sustainable healthcare solutions through a commitment to quality. Our Pay-for-Quality initiative, alongside private hospital provider Healthscope, shows the benefits of collaboration across the health sector, as we continue to improve the customer experience. This unique funding model focuses on value-for-money healthcare by facilitating better outcomes in the areas of clinical quality and safety.

Making private healthcare more affordable in the UK

We know that customers value the benefits of health insurance, but cost is one of the main barriers that stops them accessing it. We have continued our drive to improve affordability for health insurance customers and successfully negotiated the lowest price increases from hospitals for the last five years.

This, together with our drive to ensure hospitals deliver appropriate care, and our work on payment integrity and fraud detection, has enabled us to contain premium rises for our customers.

Our focus on keeping premium increases as low as possible has helped us achieve the best customer retention rates for the past decade and has given a number of our major corporate customers the confidence to extend their schemes to the whole of their workforce.

Innovating to meet our customers’ needs in Spain

In Spain, we launched Blua, which gives our Sanitas customers a platform to manage all of their healthcare needs through their mobile phones, including video consultations and online prescription and medical record management. We also launched Sanihub, a pay-as-you-go health marketplace, which offers access to diagnosis and treatments without the need for health insurance.

Helping customers wherever they are

To meet the needs of an increasing number of globally minded and mobile customers, we launched new global health plans. The plans are active in Hong Kong, the UK, Mexico, Chile, Panama, Mainland China and the UAE. In Chile, we are the country’s first insurance company to offer health insurance with international coverage. The plans were developed following extensive research to understand the needs and wants of our customers.

We provided health insurance to

19.4m people in 2015

71%of our revenue is from health insurance

Increasing our stake in Max Bupa

This year, we announced our intention to increase our stake in our Indian health insurance joint venture, Max Bupa, following the relaxation of Foreign Direct Investment rules. With market penetration of health insurance still relatively low in India, we see significant opportunities for growth working in partnership with Max India, bringing our global healthcare funding expertise to bear to create products and services that improve the lives of people in India.

9Bupa Annual Report 2015

Strategic Report

“ I knew I needed to get Lola to the US and that’s when I called Bupa. They arranged an air ambulance and when the two guys came I felt at ease – we were being rescued. Sharon, the head nurse at Bupa, was like an angel – a friend. When you need them, Bupa is going to be there.”

Daniel, Bupa Global customer

Page 10: Longer, healthier, happier lives

We build or acquireWe identify opportunities to provide health

and care services, including the development of specialist services. Where there is demand and we can make a difference, we acquire or build, or manage new hospitals, care homes,

clinics and dental centres

We marketWe make sure our potential customers

understand how Bupa can help them and ensure millions of people around the world

can enjoy better health and care

We operateWe run our health and care provision

businesses with the customer at the heart, focusing on high quality patient experience

and health and care outcomes

We reinvestWe reinvest our profits into the business

to fund and provide better health and care for millions more people

Around the world, we provide health and care services through our clinics, dental and optical centres, hospitals and care homes.

We provide healthcare

Clinics including outpatient, diagnostic, dental, optical, primary care, and other wellness services

Hospitals 17 around the world

Aged care including specialist dementia care, retirement villages, respite care, and long-term care

1

2

3

4

Page 11: Longer, healthier, happier lives

Round the clock support in Spain In Spain, our care and advice unit (UCCO) includes round-the-clock support and access to a cancer counsellor. We make sure we support our customers emotionally, providing advice about nutrition, pain management and nursing tailored to their individual needs. We also involve our patients’ families in treatment so they are fully supported in both physical and psychological recovery.

“For me and my family, Sanitas UCCO was everything; it was like our home.”Enrique, patient at Hospital Universitario Sanitas La Zarzuela

This year we cared for nearly

86,000people in our care homes

Taking a stand for the frail and elderly

We work to play an active role in ensuring that living longer also means living well. Our pioneering ‘person first’ model of care aims to promote better health outcomes for our residents through tailored care. We’re putting this approach into practice in our care homes, retirement villages and aged care services around the world.

In Australia, we are reshaping the way care is delivered through an innovative new model of care that takes a multidisciplinary and truly person-centred approach. The industry leading model provides residents with greater and more immediate access to medical services, and increased choice for how and where they receive care, creating better health and wellbeing outcomes. Some homes also have an on-site GP, who works in partnership with registered nurses and other health professionals to achieve true continuity of care for residents. The model allows for improved communication with residents and involvement of carers and their families, promoting early intervention and treatment of conditions.

Taking a holistic approach to cancer

We recognise the importance of delivering a truly holistic approach to cancer, from prevention and treatment, to supporting cancer survivors with advice and care that’s personal to them.

Cancer self-referral in the UKIn the UK, we have launched a first-of-its-kind cancer direct access service for breast and bowel cancer. The service provides our customers with access to a breast or bowel specialist, without the need for a GP referral. If cancer is diagnosed, our support team provides advice and care throughout and beyond treatment.

Specialist cancer care in PolandIn Poland, this year we acquired leading private oncology provider Magodent, based in Warsaw. This included two specialist cancer hospitals and an outpatient clinic providing full cancer treatment from consultations and diagnostics through to surgery, chemotherapy and rehabilitation. This means we can deliver better coordinated oncology care, making a difference for people living with cancer in Poland.

Access to advice and care that’s right for our customers

We are focused on innovation, continually looking for new ways to meet our customers’ health and care needs.

Growing our dental provisionWe are one of the world’s biggest dental providers, with 628 dental centres across Australia, New Zealand, the UK, Spain and Poland. This year, we added 32 new centres to our global portfolio, including our new purpose-built health and dental centre in Canary Wharf. Bupa Dental Hobart was one of nine clinics to be branded Bupa Dental in Australia.

Quality care in our hospitalsClinical quality is at the heart of the promise that we make to our customers and to patients. Our aim is to support and drive continuous improvement in quality of care and patient safety standards throughout our hospitals. In Spain this effort has been recognised by the award of the prestigious Joint Commission International accreditation for our two hospitals in Madrid. Our hospitals are the first in the city to achieve this distinction.

Also this year, we launched a family assistance service to address some of the main concerns of customers in Spain. Through this service, we help them to run their daily lives, supporting families with childcare, personal and school transportation, housework and home delivery of medicines. This allows our patients to focus on their recovery, knowing that their families are cared for.

Digital access to health servicesWe work to ensure our customers can access health and care services in the way that best suits their individual needs. In 2015, we announced a partnership with babylon so UK corporate customers can purchase virtual GP services for their employees, enabling them to book same day video consultations with doctors and have prescriptions sent directly to their chosen pharmacy or delivered to their home.

Our aged care business in Spain is leading the way in personalised care in the country’s residential care sector, most obviously in reducing the use of physical restraints and anti-psychotic drugs which traditionally have been used extensively within the sector in Spain. We’re increasingly looking to create community hubs through our care homes and build links with local Bupa day care centres in Spain.

As part of our ongoing commitment to providing even better services for older people in the UK, we completed 27 UK care home refurbishments. We’re also building two new Richmond Villages, where residents can live active, sociable and independent lives for as long as possible, and have support on hand as their needs change.

9Bupa Annual Report 2015

Strategic Report

Page 12: Longer, healthier, happier lives

We developWe identify the issues where we can

make the greatest difference

We partnerWe partner with others including non-governmental organisations,

businesses and governments

We engageWe create points of health and care engagement, raising awareness and

developing programmes, services and tools

We measure engagement

We measure points of health and care engagement with our people,

our customers and wider society

As part of delivering on our purpose, we work to make a positive impact on the world’s health and the environment,

engaging people in their health and wellbeing.

We engage people in their health and wellbeing

Consumer advocacy and campaigns on subjects including healthy lifestyles,

health system improvements and

dementia care

Partnerships with NGOs, companies and others to reach millions more people

Health and wellbeing services and tools

including telephone helplines, apps and

online tools to encourage

healthier choices

1

2

3

4

Page 13: Longer, healthier, happier lives

A healthier planet

“Good health is dependent on a healthy planet and we firmly believe that tackling climate change is one of the biggest health opportunities of the 21st century”Paul Zollinger-Read Chief Medical Officer, Bupa

Transforming health through workplaces

With over half of the world’s population in employment and spending more time at work than ever before, we believe workplaces have the potential to transform health.

Global networks for changePowered by Bupa, the global Chief Medical Officer network is a group of clinicians from over 40 companies committed to improving the world’s health through the workplace. The network aims to improve employee health and wellbeing worldwide in four focus areas: physical activity, nutrition, smoking cessation and workplace energy.

Hearts at WorkOur Hearts at Work campaign, in partnership with the World Heart Federation, saw over 125,000 people take our free heart age check across Australia, Poland, Chile, Spain and the UK to find out their heart age and how to improve it.

On World Cancer Day, educational materials developed with the Union for International Cancer Control (UICC) were shared with over 500,000 of our customers around the world.

Healthy ageing

Living well with dementiaAs part of our ‘person-first’ approach to dementia, we have partnered with Alzheimer’s Disease International (ADI), advocating for countries to develop national dementia plans to enable people to live well with dementia. In 2015, this resulted in the announcement of the Pan American Health Organization Dementia Action Plan and National Dementia Plans for 15 countries in the region.

Age UK partnershipThis year, we formed a partnership with Age UK, the UK’s largest charity working with older people. Money raised by our employees, customers and suppliers will enable the charity to deliver a national wellness programme of activities, support, information and advice to empower more older people to live well and age well.

Health and wellbeing tools and advice

This year we have launched a number of new online content hubs to help people to manage their own health and wellbeing.

Our Australian ‘Blue Room’ has been visited by over half a million people since it launched in May and gives a wealth of health and wellbeing advice and information. We have also launched a Spanish version of the Blue Room – Muy Saludable.

In the UK, through partnership with businesses, we created Bupa Boost, a mobile health and wellbeing solution. Bupa Boost puts engagement at the heart of workplace health by encouraging sustained behavioural change and focuses on four key areas: fitness, nutrition, relaxation and mindfulness. This provides businesses with an engagement tool to reach their employees in and out of the work environment and insight through data that supports the development and management of wellbeing programmes.

In the UAE, our digital wellness assessment encourages people to prioritise their health and make a positive change, with free, tailored wellbeing plans on physical and mental wellbeing.

125,000people took our heart age check

Since 2009, we’ve reduced our carbon footprint by 23%. We know we can make an even bigger difference to health and the environment by advocating for a low-carbon economy. This year, we participated in a number of collaborative events with other businesses during COP21 Paris, the UN’s climate change summit, putting health issues at the forefront of the environmental agenda. We also spoke at the launch of The Lancet health and climate change report. Find out more about our carbon reduction on page 25.

As a provider of elderly care, Bupa UK offers a support line to help people make difficult decisions. The Elderly Care Support Line is available to anyone and offers free advice on all aspects of elderly care: including finding a care home, accessing care at home or even how to pay for care.

We engage people in their health and wellbeing

11Bupa Annual Report 2015

Strategic Report

Healthy citiesIn Spain, our Madrid Healthy City project is bringing together large Spanish and international businesses to create a healthier environment and healthier workforces. The project is focused on an eight-week physical activity programme, including weekly training sessions, access to digital tools and health advice, and measurement of their progress through wearable devices.

Steve and team cycled from Manchester to Brighton to raise money for Age UK

Page 14: Longer, healthier, happier lives

12Bupa Annual Report 2015

Strategic Report

PerformanceThis year we continued to focus on understanding and meeting the changing needs of our customers around the world. We are investing for the future, increasing our sales and marketing capabilities and developing products with a particular focus on digital tools and services.

It has been a year of political and regulatory change in a number of our markets, as well as ongoing challenging economic conditions. In Australia, the economy is growing more slowly than in the past, with consumer and business confidence remaining unsettled. In the UK, increased Insurance Premium Tax (IPT) has added more pressure to the affordability of health insurance. Political and legislative changes in Spain have adversely impacted the outlook for our Public Private Partnership (PPPs) operations.

Despite this challenging environment, we have made steady progress, growing revenue by 6% and delivering profit growth across four out of five Market Units (see pages 18-21).

We have moved to strengthen ownership of our businesses in Chile and India and made a number of small strategic acquisitions in Poland, Australia and the UK.

On 1 January 2016, the Solvency II (SII) regime came into effect for European insurance companies. During 2015, substantial work was carried out to prepare Bupa for its implementation. This included approving the Company’s first Own Risk and Solvency Assessment (ORSA) which is fully owned by the Board and is now part of the governance and decision making framework. (See page 38).

We maintained our key credit ratings with Fitch (A-) and Moody’s (Baa2). Moody’s moved our outlook from stable to positive during the second half of the year, reflecting our continued profitability, global expansion and strong track record in generating capital.

Back in 2010, we committed to reducing absolute carbon emissions by 20% by 2015. We exceeded this by 3% in a period where the business grew over 40% in revenue.

Status and governanceBupa’s status as a company limited by guarantee means that we are not driven by the need to make short-term profits; we behave commercially and plan for the long term. Having no shareholders means that our profits are reinvested into the business to fund and provide more and better healthcare, fulfilling our purpose. In 2015, we reinvested £550m back into Bupa, building and developing care homes, upgrading medical provision, constructing a new hospital in Santiago in Chile and making some small strategic acquisitions to strengthen our business.

Association Members (AMs) perform a crucial oversight role for Bupa that would ordinarily be carried out by shareholders for a plc. During the year, the international experience of the Association Membership was significantly enhanced by appointing 26 new AMs with a broader mix of international experience.

In the spirit of the UK Corporate Governance Code, we engage with our AMs throughout the year, including at the AGM, an induction session for newly-appointed AMs, financial results calls and a series of briefing sessions (see page 43). The AGM is preceded by a seminar focusing on one of Bupa’s business areas and the briefing sessions are an opportunity for engagement with management and representatives of the Board on matters of strategy and performance.

For 2016, we have established a new Medical Advisory Council to advise on health horizon scanning and to support Bupa on key medical risks and opportunities relevant to delivering Bupa’s purpose. This will undertake some of the work previously done by the Medical Advisory Panel (MAP) following the decision to reshape Bupa’s approach to clinical risk and governance (see page 43). Former Chairman of the MAP, Sir John Tooke, was appointed to the Risk Committee on 1 January 2016 to further strengthen its clinical membership. I would like to take this opportunity to thank the MAP members (Sir John Tooke, Rita Clifton, Stuart Fletcher, Tessa Green, Professor Gillian Leng, Baroness Mary Watkins and Anita Donley) for their contribution and advice to the Board.

Chairman’s statement

During 2015, despite more challenging market

conditions, we made steady progress. Our diversified

geographic footprint, expertise in both health

insurance and in health and care provision, together

with our focus on the quality of experience of our

customers mean that we are well positioned to fulfil

our purpose: longer, healthier, happier lives.

Lord LeitchChairman

Page 15: Longer, healthier, happier lives

13Bupa Annual Report 2015

Strategic Report

Board and executive changesA number of changes in Board membership occurred in 2015. George Mitchell (Senior Independent Director and member of the Audit, Nomination & Governance, Remuneration and Risk Committees) and John Lorimer (Chair of the Audit Committee and a member of the Risk Committee) retired from the Board. George Mitchell and John Lorimer had served as Non-Executive Directors for eight and four years respectively and their invaluable contributions were greatly appreciated during their time at Bupa. John continues to serve on a number of Bupa’s subsidiary boards. Lawrence Churchill succeeded George Mitchell as the Senior Independent Director at the AGM in May 2015.

Clare Thompson (Chair of the Audit Committee and a member of the Risk Committee) and Roger Davis (member of the Audit and Risk Committees) were appointed to the Board during 2015. Clare brings deep experience from her career in professional services. Roger has extensive business and international experience. In January 2016, Simon Blair and Janet Voûte were appointed, bringing substantial international experience and understanding of insurance and health and care to the Board.

Theresa Heggie, Bupa’s Chief Marketing and Strategy Officer, left Bupa in December 2015. In February 2016, we announced that Penny Dudley becomes Chief Legal Officer from 1 April, succeeding Paul Newton who retires at the end of 2016 following 29 years of outstanding service.

Culture and peopleBupa is powered by the hard work and commitment of each of our 84,000 employees. Our aim is for our people to love working at Bupa. This is core to our ability to deliver for our customers and to fulfilling our purpose. We are committed to fostering a culture where our people are happier and healthier because they work at Bupa. We focus on leadership to ensure that Bupa’s values are present in everything we do.

I am proud that Bupa has a diverse culture. This is essential to ensure that we remain inclusive, innovative and focused on the needs of our extremely diverse customer base across multiple geographies. Board and executive recruitment this year has helped us maintain variation in nationalities, international experience and gender: 33% of our Board members are female, as are 31% of Bupa executives and 42% of our senior management team. The representation of women in our global workforce is over 70%.

Bupa’s success is built on our people’s commitment and their relentless focus on improving our customers’ experience. The Board and I would like to thank each one of them, for their passion and hard work in delivering another successful year in 2015.

Our 2015 Strategic Report, from pages 3-11, was reviewed and approved by the Board of Directors on 2 March 2016.

By order of the Board.

Lord LeitchChairman

Our values Our purpose and values are our guiding compass and help us navigate a complex environment, build a great culture and ensure customers remain at the heart of everything we do. We refreshed our values in 2015 identifying the qualities which will have maximum impact on our growth and delivery. Our values mean that we are committed to being: passionate, caring, open, authentic, accountable, courageous, and extraordinary. They were embedded throughout the organisation in 2015.

Page 16: Longer, healthier, happier lives

14Bupa Annual Report 2015

Strategic Report

14Bupa Annual Report 2015

Strategic Report

Bupa 2020Bupa 2020 is our strategic vision for how we will deliver our purpose: longer, healthier, happier lives, and help millions of people enjoy better health. We have three strategic goals: being a health and care partner to millions more people, delivering extraordinary business performance, and being an organisation where people love to work (see inside front cover).

PerformanceIn 2015, we focused on driving performance by innovating to meet the needs of our customers, with a particular focus on continuous improvement of customer experience and making health and care more affordable and accessible.

The operating environment was challenging in many of our markets, but we continued to grow and maintain our strong market positions. We delivered revenue growth, up 6% to £9,828.4m with good progress in our Market Units. Customer numbers grew 12% to 32.2m with a particularly strong contribution from the UK Market Unit, where health insurance customers grew significantly during the year, partly as a result of our strategic partnership with Benenden. Growth in Bupa Arabia also contributed to increased customer numbers.

We delivered solid underlying profit growth across most of Bupa with Australia and New Zealand, the UK, IDM, and Bupa Global all up. Political and regulatory changes in Spain, particularly the changing sentiment towards private participation in public services, have impacted the outlook for our PPPs. As a result, we have made a non-cash adjustment of £52m to reflect reassessed profitability over the life of the contract (including previously reported profits). This was the key factor behind the 2% fall in group underlying profit.

Cash generation remained strong during the period. Our status as a company limited by guarantee, with no shareholders, means that this is all available to reinvest into the business in service of our purpose.

Statutory profit was down 39% at AER due mainly to the impact of the impending introduction of the National Living Wage in the UK from April 2016, which represents a significant increase in the operating costs of UK care homes. This, combined with ongoing funding pressures experienced by local authorities, means there are significant margin pressures in the UK care services market. Although we are actively renegotiating fees to ensure that they

cover the true costs of care, we cannot at this stage be confident we will mitigate the impact in its entirety. As a result, there has been a partial write down of the value of our UK care services business. This impacts our statutory profit by £181.9m.

In 2010, we committed to reduce absolute carbon emissions by 20% by 2015 versus our 2009 baseline, so this was a significant year for our carbon reduction programme. I am delighted to say that we exceeded this target, delivering a 23% reduction over the six-year period, at the same time as growing the business by over 40% in revenue, tripling our customer numbers and employing 32,000 more people. During 2014 and 2015, we invested a total of £50m through our Energy Saver Fund, which we created for projects that deliver a reduction in ongoing operating costs as well as in carbon. Over 950 projects with strong investment returns were implemented over the two years, including more than 230 solar installations on our buildings in 2015. We purchased electricity from certified renewable sources, which now accounts for more than 35% of our annual electricity consumption.

During 2015, a substantial amount of work was carried out to prepare for Solvency II implementation which came into force on 1 January 2016. We strengthened our understanding of risks and risk management and developed the Bupa-specific insurance premium risk parameter. This was approved by the Prudential Regulation Authority in November in recognition of our size, experience and geographical diversity, and enables us to reduce capital requirements compared with the Standard Formula.

We are focused on improving the customer experience across the business, in line with our ambition to become the most trusted and recommended health and care company in the world. This included redesigning the customer journey for our Global Health propositions in Bupa Global, and proactively contacting our customers in Australia to gain feedback and shape product development and process improvements.

Healthcare partner to millions more peopleWe are growing our provision businesses across a number of geographies. In dental we added 18 new centres in Australia, six in the UK, and eight in Spain, bringing our total to 628 globally. We have expanded in aged care with new homes or services in all

Stuart FletcherChief Executive Officer

We made steady progress this year, despite challenging

economic conditions and political and regulatory changes in a number of

our markets. By focusing on meeting the needs

of customers across our diversified geographic

footprint offering health insurance as well as providing

health and care, we maintained strong market

positions and grew revenue and customer numbers

in 2015.

Watch our CEO end of year message:

www.bupa.com/CEOMessage

CEO’s statement

Page 17: Longer, healthier, happier lives

15Bupa Annual Report 2015

Strategic Report

15Bupa Annual Report 2015

Strategic Report

We are growing our partnerships with others. In the UK, we signed a major partnership agreement with Benenden Health to provide underwriting, customer service and claims management to their 900,000 members. In Spain, we partnered with Santa Lucia, a leader in family protection insurance, to develop four new products for our customers. Our partnership with Hang Seng Bank in Hong Kong is performing well. In the US, we are deepening our engagement with the Blue Cross Blue Shield Association.

We have purchased additional shares in Bupa Chile, taking our ownership to 73.7% at the year end. In 2016, we increased this to 100%. This creates a strong foundation for us to become a health and care partner to people in Chile and Latin America more broadly.

In May, we announced a new partnership with the global NCD (non-communicable diseases) Alliance – a network of 2,000 organisations working to prevent diseases such as cancer, diabetes and heart disease. This partnership is focused on encouraging employers to become more active partners in their people’s health and wellbeing and complements our existing partnerships with the World Heart Federation, Union for International Cancer Control, Alzheimer’s Disease International and Be He@lthy Be Mobile.

With over half of the world’s population in employment and spending more time at work than ever before, we believe workplaces have the potential to transform health. Our Hearts at Work campaign, developed in partnership with the World Heart Federation, saw over 125,000 people take our free heart age check across Australia, Poland, Chile, Spain and the UK. In Spain, our Madrid Healthy City project is bringing together businesses to create a healthier environment and healthier workforces, measuring participants’ cardiovascular risk and providing tailored health recommendations to help them reduce it. In April, we formally launched our global Chief Medical Officer (CMO) Network, bringing together CMOs from 40 companies across a range of sectors including technology, pharmaceutical, financial services and FMCG. Together we are exploring how we can combine our experience to improve employee health and wellbeing.

A place where our people love to workEach and every one of our 84,000 people makes the difference. They contribute in extraordinary ways every day to deliver on our purpose. This year we have strengthened our focus on our Bupa values – caring, accountable, authentic, passionate, open, courageous and extraordinary. They are key to driving performance and delivering our purpose.

We want Bupa to be one of the very best employers in the world – we have a compelling purpose and with no shareholders, reinvest profits to provide more and better health and care. We want our people to love working at Bupa and be healthier and happier for it. In the past year, our employee engagement index has increased by 3% to 71%. Our commitment to continual performance improvement, a culture of ongoing communication and feedback, as well as employee health and wellbeing programmes have helped to deliver this.

Personal growth is vital to our success and I’m proud of our talented people working together to deliver funding and provision of health and care, to drive sustainable, profitable, purposeful growth. This year there was a 10% increase in the completion of online learning activity with 50,000 of our employees having access to our global online learning platform. We have also further strengthened our focus on talent management and succession planning, building deeper and more diverse pipelines of future leaders.

Our success is a result of the efforts of each and every one of our 84,000 people as well as our many partners who are an essential part of what we do every day. I thank our people for their hard work and dedication and our customers for putting their trust in us and I appreciate the contribution of our partners.

OutlookLooking forward, we anticipate market conditions will remain challenging, particularly in Australia, the UK, and Spain. However, our strategic discipline, international scale, strong brand and market-leading positions, supported by our robust balance sheet, mean we are positioned for continued sustainable revenue and profit growth.

Sanitas SegurosWe delivered good performance in our Spanish health insurance business, Sanitas Seguros, in 2015. We focused on satisfying the health needs of our customers and improving customer experience which led to a significant reduction in the number of lapses compared to 2014. New sales were also up by 28%.

We continue to innovate to enhance our customers’ experience. Blua, our first wholly digital health insurance product for customers in Spain, launched in November. It gives customers access to one of our healthcare professionals through video consultations, offering them personalised advice and giving them another option should they not wish or be able to access a doctor or nurse in person. It also includes an online prescription management tool.

of our care services businesses. In Australia, we are piloting services in general practice and hearing loss. In November, we opened our second GP Clinic in Sydney and over the course of the year, we launched Bupa Hearing in three of our retail stores in Melbourne.

We are focused on innovating to meet the needs of our customers with an increased focus on digital products and services. We launched Bupa Boost in the UK, a digital platform for employers to engage their entire workforces in health and wellbeing. In Spain, we introduced Blua, a health insurance product that enables customers to manage their health via their mobile devices and access medical consultations through video conference, as well as Sanihub, a pay-as-you-go marketplace for health services. We created online health and care hubs in Australia (the Blue Room) and Spain (Muy Saludable) to provide a wide range of health and wellbeing advice and information. These are available to everyone, not just our customers, helping us to engage millions more people in their health and wellbeing.

Stuart FletcherChief Executive Officer

Page 18: Longer, healthier, happier lives

16Bupa Annual Report 2015

Strategic Report

16Bupa Annual Report 2015

Strategic Report

We track our performance against a number of key performance indicators which are aligned to our

Bupa 2020 strategic vision.

Our group KPIs

1 Our target to reduce absolute carbon emissions by 20% by the end of 2015 is based on a 2009 baseline and is reported in line with the measurement requirements of the Carbon Trust Standard and the market-based methodology of GHG Protocol Scope 2 Guidance and in accordance with the principles of the WRI/WBCSD GHG Protocol. 2009 and 2015 data has been verified by the Carbon Trust.

Strategic goal KPI Trend (AER) Performance commentary

Healthcare partner to millions more people

Customer numbers

32.2m 12%

2015

2014

2013

32.2m

28.7m

21.9m

In 2015, we made significant progress on our journey to be a healthcare partner to millions more people. We added 3.5m customers, up 12% on 2014, mainly through organic growth. We saw significant growth in many of our businesses. The UK made a very strong contribution to this, partly

as a result of our strategic partnership with Benenden. Our International Development Markets business also showed strong growth, primarily driven by Saudi Arabia.

Health and care engagement

160m 19%

2015

2014

2013

160m

134m

99m

We continued to engage our people, customers and wider society in their health and wellbeing. In 2015 we created 160m points of health and care engagement, up 19%. This measure includes each occasion someone engages with a health and wellness awareness raising campaign, for

example through our social media activities or health events. It also includes deeper engagements with specific programmes, services and tools that we have developed to help people make simple changes to their behaviour and positively impact on their health. See page 11.

Performance

Revenue

£9.8bn 6% CER 1% AER

2015

2014

2013

£9.8bn

£9.8bn

£9.1bn

We are committed to delivering solid and sustainable financial performance and investing in activities that create long-term economic value. We continue to grow revenue, up 6% at CER to £9.8bn, reflecting good progress across our

Market Units. Over 65% of Bupa’s revenue is generated by international operations, reflecting our global footprint. Strong business performance means we are well-resourced to be a healthcare partner to millions more people.

Underlying profit

£582.5m 2% CER ]9% AER

2015

2014

2013

£582.5m

£637.8m

£638.5m

We delivered solid underlying profit growth across most of Bupa. Following regulatory changes leading to a revised outlook for our PPPs in Spain, we have recognised an adjustment to reflect the reassessed profitability over the life of the contract. This was the primary cause of a fall in group underlying profit, down 2% at CER to £582.5m.

As we have no shareholders, our profit is reinvested into the business. This helps us to provide more and better healthcare for our current and future customers to fulfil our purpose. See page 22 for our definition of underlying profit.

Carbon footprint reduction1

23% 9%

2015

2014

2013

23%

14%

13%

In 2015, we invested a further £25m in low carbon and renewable energy projects on many of our sites through our Energy Saver Fund. This brought the total number of projects invested in to over 950 in two years. We also continued to source electricity from renewable sources totalling 35% of our electricity requirement in 2015.

These actions have contributed to us reducing our carbon footprint by 23% since 2009, exceeding our target of 20%. Going forward we will continue to invest in environmental improvement opportunities and increase the amount of electricity we purchase and use from renewable sources. See page 25.

A place where our people love to work

Employee engagement

71% 3%

2015

2014

2013

71%

68%

67%

2015 saw more people than ever before participating in our Global People Survey (GPS), with 60,412 (76%) of our people responding. This year’s GPS also saw the inclusion of all employees from our recently acquired Bupa Chile, Dental Corporation and Highway to Health businesses for the first time.

Within the GPS we measure pride, satisfaction, advocacy and commitment, and from this we develop our employee engagement index. This year, employee engagement improved by 3% to 71%, demonstrating a belief in the future of Bupa, a strong connection to our purpose and the continued commitment of our people to achieving our ambitious goals.

Performance excellence

77% 2%

2015

2014

2013

77%

75%

73%

Within our GPS, our performance excellence index measures our commitment to delivering high quality products and customer service and how enabled our people feel in delivering for our customers. It draws from a cross-section of

indicators including training, speed of response to customers and perception of leadership commitment to high quality products, services and care. We have made good progress in our performance excellence index again, up 2% to 77%.

Leadership

71% 2%

2015

2014

71%

69%

Our leadership index, introduced last year, saw good progress with a 2% increase to 71%. This index measures the extent to which our people see our leaders are committed to continuously growing themselves, growing others and growing the business to improve the health of the world.

We continue to focus on our Bupa Leaders Are framework, which has been further embedded across Bupa in 2015. We see this as key to attracting new leaders to the business, growing our existing leadership capability, and rewarding our leaders for their contribution to Bupa.

Page 19: Longer, healthier, happier lives

17Bupa Annual Report 2015

Strategic Report

17Bupa Annual Report 2015

Strategic Report

Strategic goal KPI Trend (AER) Performance commentary

Healthcare partner to millions more people

Customer numbers

32.2m 12%

2015

2014

2013

32.2m

28.7m

21.9m

In 2015, we made significant progress on our journey to be a healthcare partner to millions more people. We added 3.5m customers, up 12% on 2014, mainly through organic growth. We saw significant growth in many of our businesses. The UK made a very strong contribution to this, partly

as a result of our strategic partnership with Benenden. Our International Development Markets business also showed strong growth, primarily driven by Saudi Arabia.

Health and care engagement

160m 19%

2015

2014

2013

160m

134m

99m

We continued to engage our people, customers and wider society in their health and wellbeing. In 2015 we created 160m points of health and care engagement, up 19%. This measure includes each occasion someone engages with a health and wellness awareness raising campaign, for

example through our social media activities or health events. It also includes deeper engagements with specific programmes, services and tools that we have developed to help people make simple changes to their behaviour and positively impact on their health. See page 11.

Performance

Revenue

£9.8bn 6% CER 1% AER

2015

2014

2013

£9.8bn

£9.8bn

£9.1bn

We are committed to delivering solid and sustainable financial performance and investing in activities that create long-term economic value. We continue to grow revenue, up 6% at CER to £9.8bn, reflecting good progress across our

Market Units. Over 65% of Bupa’s revenue is generated by international operations, reflecting our global footprint. Strong business performance means we are well-resourced to be a healthcare partner to millions more people.

Underlying profit

£582.5m 2% CER ]9% AER

2015

2014

2013

£582.5m

£637.8m

£638.5m

We delivered solid underlying profit growth across most of Bupa. Following regulatory changes leading to a revised outlook for our PPPs in Spain, we have recognised an adjustment to reflect the reassessed profitability over the life of the contract. This was the primary cause of a fall in group underlying profit, down 2% at CER to £582.5m.

As we have no shareholders, our profit is reinvested into the business. This helps us to provide more and better healthcare for our current and future customers to fulfil our purpose. See page 22 for our definition of underlying profit.

Carbon footprint reduction1

23% 9%

2015

2014

2013

23%

14%

13%

In 2015, we invested a further £25m in low carbon and renewable energy projects on many of our sites through our Energy Saver Fund. This brought the total number of projects invested in to over 950 in two years. We also continued to source electricity from renewable sources totalling 35% of our electricity requirement in 2015.

These actions have contributed to us reducing our carbon footprint by 23% since 2009, exceeding our target of 20%. Going forward we will continue to invest in environmental improvement opportunities and increase the amount of electricity we purchase and use from renewable sources. See page 25.

A place where our people love to work

Employee engagement

71% 3%

2015

2014

2013

71%

68%

67%

2015 saw more people than ever before participating in our Global People Survey (GPS), with 60,412 (76%) of our people responding. This year’s GPS also saw the inclusion of all employees from our recently acquired Bupa Chile, Dental Corporation and Highway to Health businesses for the first time.

Within the GPS we measure pride, satisfaction, advocacy and commitment, and from this we develop our employee engagement index. This year, employee engagement improved by 3% to 71%, demonstrating a belief in the future of Bupa, a strong connection to our purpose and the continued commitment of our people to achieving our ambitious goals.

Performance excellence

77% 2%

2015

2014

2013

77%

75%

73%

Within our GPS, our performance excellence index measures our commitment to delivering high quality products and customer service and how enabled our people feel in delivering for our customers. It draws from a cross-section of

indicators including training, speed of response to customers and perception of leadership commitment to high quality products, services and care. We have made good progress in our performance excellence index again, up 2% to 77%.

Leadership

71% 2%

2015

2014

71%

69%

Our leadership index, introduced last year, saw good progress with a 2% increase to 71%. This index measures the extent to which our people see our leaders are committed to continuously growing themselves, growing others and growing the business to improve the health of the world.

We continue to focus on our Bupa Leaders Are framework, which has been further embedded across Bupa in 2015. We see this as key to attracting new leaders to the business, growing our existing leadership capability, and rewarding our leaders for their contribution to Bupa.

Page 20: Longer, healthier, happier lives

18Bupa Annual Report 2015

Strategic Report

Australia and New Zealand

Dean Holden

Revenue

£3,648.4m 8% CER

Underlying Profit

£ 279.5m 2% CER

Customers

6.2m 9%

Operating environment ° The Australian economy is growing

more slowly than historically, with consumer and business confidence remaining unsettled

° We are seeing increasing downgrades and discontinuances in health insurance as affordability pressures continue and competition intensifies

° In New Zealand, government health policies encouraging care at home have led to lower care home occupancy across the sector

° In Australia, we have focused on mitigating the effect of the removal of dementia and payroll tax supplements, implemented on 1 January 2015

° We contributed to a range of major Federal Governmental reviews of the health sector, including the private health insurance, primary healthcare and aged care sectors, focused on the long-term affordability of the system

° During 2015, prudential supervision of our Australian insurance business transferred to a new regulator, Australian Prudential Regulation Authority (APRA). In 2016, we will be monitoring any changes to the regulatory regime and potential impact on Bupa.

Our Market Units

We operate our business through five Market Units.

Our structure enables us to better serve our customers where they are and support

our growth.

Our five Market Units comprise individual businesses that reflect our services:

Australia and New Zealand ° Bupa Health Insurance (health insurance

in Australia)

° Bupa Health Services (including dental and optical provision, Bupa Medical Visa Services, TeleHealth and GP clinics)

° Bupa Aged Care Australia

° Bupa Care Services New Zealand

UK ° Bupa Health Funding

° Bupa Care Services

° Bupa Health Clinics (clinics, occupational health services and dental centres)

° Bupa Home Healthcare1

° Bupa Cromwell Hospital

Spain and Latin America ° Sanitas Seguros (health insurance

in Spain)

° Sanitas Hospitales and New Services (including hospitals and clinics)

° Sanitas Dental

° Sanitas Mayores (previously known as Sanitas Residencial)

° Bupa Chile (including health insurance, hospitals and medical clinics)

International Development Markets ° Bupa Arabia (health funding business

in Saudi Arabia in which Bupa has a 26.25% stake)

° LUX MED (health funding and provision in Poland)

° Max Bupa (26:74 health insurance joint venture between Bupa and Max India Limited)

° Bupa Hong Kong (health insurance)

° Quality HealthCare (private clinic network in Hong Kong)

° Bupa Thailand (health insurance)

° Bupa China (representative office in China)

Bupa GlobalInternational health insurance, travel insurance and medical assistance provided worldwide to individuals, small businesses and global corporate customers through three operating units:

° Bupa Global North America

° Bupa Global Latin America

° Bupa Global Business Unit

1 UK: In February 2016 we agreed to sell Bupa Home Healthcare to Celesio.

2 ANZ: In 2014, profit benefited from a change in regulation which enabled us to reassess the amount of money held as a risk margin against the provision for claims.

3 UK: babylon is a personal health service that offers users video consultations with local doctors and access to prescriptions via a mobile app.

4 IDM: Revenue from our Bupa Arabia associate and Max Bupa joint venture are not included in our revenue figures. However, customer numbers and the appropriate share of profit from these businesses are included in our reported numbers.

5 BG: Revenue from our Highway to Health associate is excluded from our reported figures. Customer numbers and the appropriate share of profit from this business are included in our reported numbers.

6 BG: Blue Cross Blue Shield Association is a national federation of 36 independent, community-based and locally operated Blue Cross and Blue Shield companies that collectively provide healthcare coverage for more than 106 million members. Bupa Global is an independent licensee of the Blue Cross Blue Shield Association.

7 BG: Restrictions and limitations apply in some areas. See www.bupaglobalaccess.com for more information.

Page 21: Longer, healthier, happier lives

19Bupa Annual Report 2015

Strategic Report

continued, but lower rates of, decline in the individual health insurance segment. Home Healthcare1 contract wins and growth from dental centres acquired in 2014 also made a positive contribution to revenue. Overall, customer numbers grew by 28%, a significant proportion due to our strategic partnership with Benenden. Underlying profit growth was 4%, due to strong management of costs and growth in our health insurance business, Home Healthcare and Richmond Villages.

The ongoing funding challenges in the care sector, compounded by the introduction of the National Living Wage in the UK from April 2016, contribute to significant pressures on margins. As we cannot at this stage be confident we will mitigate the whole of the impact, there has been a partial write down of the value of our care services business. This is comprised of goodwill impairment of £114.1m and a write down in the value of property and equipment of £179.7m, of which £67.8m has been recognised in the Income Statement, with the balance being taken to the revaluation reserve.

We have continued our drive to improve affordability for health insurance customers. We negotiated the lowest price increases from hospital providers for the last five years, resulting in lower premium rises. Our focus on containing premium increases has led to record levels of customer retention for the past decade and a number of major corporate customers extending schemes to the whole of their workforce.

We remain committed to extending our range of services for older people. We refurbished 27 care homes and acquired Hadrian Healthcare Limited, including five care homes and two development sites. Richmond Villages has continued its strong performance. Richmond Witney brings our portfolio to six villages in 2016.

As part of our focus on meeting the changing healthcare needs of our customers, we continue to invest in digital innovations and new propositions. We partnered with babylon3 to provide virtual healthcare services and launched Bupa Boost, a digital platform for UK employers to engage their entire workforces in health and wellbeing (see page 11). We launched a first-of-its-kind cancer self-referral service for breast and bowel cancer, allowing our customers quick, direct access to specialist diagnostics without the need for a GP referral. We also expanded our dental provision during the year (see page 9).

PerformanceOur focus this year has been on the long-term affordability of health insurance, improving customer experience across all business areas, and enhancing digital capability. We are expanding our provision businesses through acquisitions, opening new aged care homes and developing new services. As a result, we saw good revenue growth over the year, up 8% overall with growth in all four Business Units. Customer numbers also increased to 6.2m, up 9%. In our health insurance business, we increased resources in our retention teams to proactively reach out to customers. We also introduced a range of initiatives to enhance the customer experience and improve customer retention, including real-time credit card payments. Underlying profit, up 2%, benefited from this focus, showing good year-on-year growth, particularly in light of the previously reported risk margin release in 2014.2

We continued to grow our aged care business across Australia and New Zealand by opening new homes. As a result, our occupancy dropped marginally, as new homes take time to reach full occupancy, to 89.1% in New Zealand and to 92.9% in Australia.

We acquired 18 dental practices across Australia and branded nine clinics as Bupa Dental. We opened six Bupa Optical stores. Bupa Medical Visa Services expanded to include medical assessments in Australia for visa applicants to Canada and New Zealand. We launched a pilot of Bupa Hearing in three of our retail stores in Melbourne, and in the second half of the year, we opened our second GP clinic in Sydney. Our new digital Blue Room, provides a wide range of health and wellbeing advice and information. Launched in May, it is available to everyone, not just our customers.

We are focused on improving customer experience to mitigate the impact of the sector-wide trends for downgrades and discontinuances in the insurance business. In our provision businesses, we have enhanced sales capability to give our customers a consistent experience across all of our products and services.

United Kingdom

Richard Bowden

Revenue

£2,857.8m 5% CER

Underlying Profit

£182.6m 4% CER

Customers

5.1m 28%

Operating environment ° We are seeing growth in the Corporate

segment despite overall decade-long decline in the health insurance market

° Reduced affordability of health insurance due to higher Insurance Premium Tax (IPT) – we are focused on containing healthcare costs, including those charged by private hospitals

° Local authority fees for care services are often below the true cost of delivering care, compounded by rising operating costs

° The move to a National Living Wage will increase the cost of delivering care – we are making the case that local authority fees will need to increase to cover this.

PerformanceOur priority in 2015 was growing our business by meeting customers’ changing needs and making private healthcare more affordable and accessible. Revenue increased 5% with growth across all Business Units for the first time in five years. Health insurance saw improved customer retention, and growth in new business in the small and medium-sized enterprises (SME) and corporate segments. This was partially offset by the

Page 22: Longer, healthier, happier lives

20Bupa Annual Report 2015

Strategic Report

Spain and Latin America Domestic

Iñaki Ereño

Revenue

£1,824.5m 9% CER

Underlying Profit

£ 70.1m 40% CER

Customers

5.2m 6%

Operating environment ° While still a challenging environment,

the economy has outperformed GDP growth forecasts and unemployment rates have fallen

° The Spanish health insurance market saw lower growth rates when compared to historic levels and is experiencing intense price competition

° Operating conditions for PPPs have become more challenging, driven by decisions made by regional governments in a context of budget constraints and political change

° The Free Choice Act was introduced, allowing people from the catchment area of our Manises hospital greater choice of hospitals, adversely impacting our revenue

° In Chile, we are actively engaged in ongoing government discussions on the reform of the Isapres health insurance system.

PerformanceThis year we have focused on innovation and new product development to meet our customers’ needs, as well as responding to the political uncertainty affecting PPPs by demonstrating clinical excellence and cost-efficiency to local governments. Revenue increased by 9% over the year, driven by a continued strong performance from Sanitas Dental as well as the full year contribution of our 2014 acquisitions, Bupa Chile and the Virgen del Mar hospital. Customer numbers increased 6%, benefiting from the full year contribution of our 2014 acquisitions, and Sanitas Dental where we reached one million dental insurance customers. We saw record occupancy in Sanitas Mayores, almost at full capacity with an average occupancy rate of 95.7%.

Health insurance made a strong contribution to profit, particularly due to action on claims costs. However underlying profit for the Market Unit as a whole declined primarily as a result of a non-cash adjustment of £52m to reflect a reassessment of the profitability of our PPPs. In Chile, increased operating costs and higher claims also impacted profit. We are investing for the long term in Latin America and have taken action to improve cost efficiency. In December, we purchased an additional 17.3% shareholding in Bupa Chile and since the period end, we have acquired a further 26.3% of the shares. This brought our total shareholding to 100% giving us greater control over Bupa Chile and reinforcing our commitment to the Chilean market.

We launched a number of insurance products including digital products and services that allow our customers to manage their individual health needs wherever they are. This included Blua, a health insurance product that enables our customers to manage their health via their mobile devices and access medical consultations through video conference, and Sanihub, a pay-as-you-go marketplace for health services. In Chile, we introduced Salud Global, the first tiered range of international private medical insurance products in the Chilean market, in partnership with the Bupa Global Market Unit.

We have launched Muy Saludable, a Spanish-language version of the Blue Room hub launched in Australia this year, and Care Well, a website focused on the care needs of people living with dementia.

International Development Markets

David Fletcher

Revenue

£551.1m 8% CER

Underlying Profit

£43.1m 169% CER

Customers

13.7m 13%

Operating environment ° Emerging markets have seen

slowing growth

° In Poland, new laws voted through before the recent election saw positive developments in e-health and expansion of the responsibilities of nurses and midwives, which are favourable for our LUX MED business

° In Hong Kong, India, and Thailand we are seeing regulatory developments that look to meet the changing healthcare demands and funding needs of their ageing societies

° Following a change in legislation to liberalise foreign investment limits for insurance in India, we signed an agreement with Max India to increase our shareholding in our health insurance joint venture, Max Bupa, to 49%. This application is now being considered by regulatory authorities.

PerformanceIDM performed very well in 2015, with good revenue growth, a double-digit increase in customer numbers, and excellent profit growth of 169%. We are focused on growing and developing our existing markets while exploring opportunities to

Page 23: Longer, healthier, happier lives

21Bupa Annual Report 2015

Strategic Report

enter new territories where we see potential to deliver strong growth and increase healthcare choices for consumers. Expansion of our clinic and hospital network in Poland made a good contribution to revenue4, up 8% overall, supported by growth in our Hong Kong insurance business as a result of strong sales in the corporate sector and our distribution partnership with Hang Seng Bank. Growth in customer numbers was driven primarily by our businesses in Saudi Arabia and Poland. Despite Saudi Arabia’s cooling economic conditions Bupa Arabia made a very significant contribution to underlying profit due to growth in the Corporate and SME sectors.

This year we completed a series of acquisitions in Poland to strengthen our presence in the market and develop our clinical offering. In July we acquired Magodent, a leading Warsaw-based oncology provider with two hospitals and an outpatient clinic. This allows us to deliver the type of coordinated oncology care which we know makes a difference to outcomes for people living with cancer. We are expanding our clinic footprint in Poland, extending our geographic reach to customers through organic growth and acquisition of new sites across the territory.

We have introduced a number of new products across both our insurance and provision businesses to meet our customers’ needs. In Saudi Arabia, we launched a new wellness programme, Tebtom, a free telephone helpline offering customers access to doctors for advice on a diverse range of healthcare issues. This aims to improve health outcomes, drive customer loyalty and retention and raise awareness of Bupa as a healthcare leader. In Hong Kong, we launched Bupa Health Plus, a more flexible and affordable product that customers can tailor to their individual needs. We ended the year winning our largest ever corporate account in Hong Kong. In Poland, we continue to grow our fee-for-service clinics under the Profemed brand offering a range of services including sports and rehabilitation services, dental treatment and aesthetic medicine.

Bupa Global

Robert Lang

Revenue

£947.5m 5% CER

Underlying Profit

£103.9m 2% CER

Customers

2m 5%

Operating environment ° The market for international private

medical insurance continues to grow, with an increasing number of people seeking access to premium healthcare at home or as they study, live, travel or work abroad

° We anticipate that the continued growth of this customer segment will drive demand for both Individual and Corporate international private health insurance

° Bupa Global operates in a wide range of countries around the world, with differing legal and regulatory requirements. We remain focused on understanding the application of these requirements to our products and services as well as tracking and responding to any changes. We are seeing a trend towards mandatory health cover regimes in a number of countries and are monitoring these developments closely.

PerformanceIn Bupa Global, we have been focused on regionalising the business to better serve our customers in their own language, culture, and time zone, and launching our tiered international health insurance products. As previously reported, we are beginning to see the impact of our decision to exit non-strategic markets and re-price previously loss-making corporate accounts. The re-pricing has led, to some of those contracts lapsing. This had a positive impact on underlying profit which rose 2% year on year, although it contributed to a decline in revenue and customer numbers5. Revenue was also impacted by a challenging period for new sales in some segments.

Profit improved due to our focus on improving operational effectiveness, delivering cost efficiencies and reducing claims costs. This profit growth was achieved alongside significant investment in a programme of organisational change to enhance capabilities in sales, health and benefits, actuarial, and risk and compliance, and to deliver our regionalisation strategy. In 2015, we completed the establishment of new operating regions for Greater China and the Middle East.

In the US, we are deepening our strategic global partnership with Blue Cross Blue Shield Association6, which created the largest combined healthcare provider network ever formed in the IPMI market. The new global provider network became available in January 2015 through co-branded products sold outside of the US7 to new Bupa Global customers, as well as existing customers transitioning to co-branded products throughout 2015.

We launched our international tiered products in seven markets in 2015: Chile, China, Mexico, Panama, Hong Kong, the UAE and the UK. A number of these launches were conducted in partnership with other Market Units to benefit from Bupa’s in-market capabilities and brand presence.

We are now starting to see signs of positive momentum for revenue in the Market Unit, particularly in the Individual segment as a result of our investment in new sales capabilities, a positive contribution from our recently launched tiered products and the impact of our new distribution partnership with Hang Seng Bank.

See page 18 for footnotes.

Page 24: Longer, healthier, happier lives

22Bupa Annual Report 2015

Strategic Report

22Bupa Annual Report 2015

Strategic Report

Summary of results (AER)

2015 £m

2014 £m

Total revenue 9,828.4 9,777.8

Underlying profit before taxation

582.5 637.8

Profit before taxation 374.3 609.2

Profit for the year 278.3 522.8

Currency

2015 2014%

Change

AUD average rate 2.0370 1.8265 12%

AUD closing rate 2.0210 1.9082 6%

EUR average rate 1.3782 1.2411 11%

EUR closing rate 1.3560 1.2877 5%

USD average rate 1.5288 1.6475 -7%

USD closing rate 1.4734 1.5581 -5%

Number of customers by Market Unit

1. Australia and New Zealand 19%2. United Kingdom 16%3. Spain and Latin America Domestic 16%4. International Development Markets

(IDM Owned subsidiaries) 22%5. International Development Markets

(IDM JVs & Associates) 16%6. International Development Markets

(IDM Micro health insurance) 5%7. Bupa Global (BG Owned subsidiaries) 3%8. Bupa Global (BG Associates) 3%

We achieved good revenue growth of 6% at constant exchange rates (CER). Despite solid growth across most of Bupa, our underlying profit1 before tax declined by 2% to £582.5m (2014: £592.6m). This was primarily driven by a change in legislation resulting in a revised outlook for our PPPs in Spain, with a non-cash adjustment to reflect this reassessed profitability over the life of the contract in line with IFRIC 122 .

After the impact of foreign exchange is considered, notably a weakening of the Australian dollar and the Euro and a strengthening of the US dollar compared with Sterling (see currency table below), we delivered 1% revenue growth, while underlying profit declined by 9%.

Our statutory profit of £374.3m (2014: £609.2m) was down 39% due mainly to ongoing funding pressures on local authorities and the impact of the impending introduction of the National Living Wage in the UK, resulting in an impairment of goodwill and a write down in the value of property and equipment in Care Services UK.

We enhanced our governance structure ahead of the implementation of Solvency II from 1 January 2016. We maintained a strong capital position and we are well capitalised under the Solvency II regime.

Our 2010 target of reducing our carbon footprint by 20% from a 2009 baseline by 2015, has been exceeded by 23%, despite significant business growth.

Group revenue (actual exchange rates, AER)

£9.8bn2015

2014

2013

2012

2011

£9.8bn

£9.8bn

£9.1bn

£8.4bn

£8.0bn

Underlying profit before tax1 (AER)

£582.5m2015

2014

2013

2012

2011

£582.5m

£637.8m

£638.5m

£609.5m

£559.0m

Revenue by Market Unit (AER)

1.

2.

3.

4.

5.

Group total revenue

£9,828.4m

1. Australia and New Zealand 37%2. United Kingdom 29%3. Spain and Latin America Domestic 18%4. International Development Markets 6%5. Bupa Global 10%

1 Profit before taxation is adjusted for amortisation and impairment of intangible assets arising on business combinations, impairment of goodwill, net property revaluation gains or losses, realised and unrealised foreign exchange gains and losses, gains or losses on return seeking assets, profits or losses on the sale of businesses and fixed assets, restructuring costs and transaction costs on acquisitions and disposals.

Financial review

Evelyn BourkeChief Financial Officer

Against a backdrop of challenging market

conditions in our larger markets, we are pleased with

the steady progress that Bupa has made in 2015.

We grew revenue and saw solid underlying profit

growth across most of Bupa.

1.

2.

3.

4.

5.

7. 8.6.

Total customers

32.2m

Page 25: Longer, healthier, happier lives

23Bupa Annual Report 2015

Strategic Report

23Bupa Annual Report 2015

Strategic Report

Underlying profit by Market Unit (AER)

1. Australia and New Zealand 41%2. United Kingdom 27%3. Spain and Latin America Domestic 10%4. International Development Markets 7%5. Bupa Global 15%

Revenue and customersCustomer numbers increased by 12% to 32.2m, with revenue up 6%, reflecting growth in all Market Units except Bupa Global, where we exited a number of non-strategic markets and a number of significant, although loss-making, Corporate contracts lapsed.

For our joint ventures and associates, we recognise the total population of customers, but in accordance with IFRS accounting standards, we do not recognise any revenue where we have a non-controlling interest, and only report our share of profit. This affects our International Development Markets and Bupa Global Market Units.

by expansion of the Health Services businesses including the full year impact of Bupa Medical Visa Services.

In the UK, steady profit growth of 4% is driven by higher premiums in Bupa Health Funding and increased volumes in Bupa Home Healthcare, coupled with a focus on cost reduction across the Market Unit.

The impact of IFRIC 12 on the PPPs is the most significant driver of the Spain and Latin America Domestic result, which is down by 40% (to £70.1m at CER). This is partly offset by an improved loss ratio in the Sanitas private medical insurance business.

Over 100% higher profit in International Development Markets is driven by exceptional performance in Bupa Arabia which has benefited from rapid growth of the business, although lower global oil prices are starting to impact adversely on trading conditions.

Despite the revenue shortfall, Bupa Global Market Unit has achieved 2% underlying profit growth (CER) due to improved loss ratios following the re-pricing of previously loss-making Corporate contracts which led to some of those contracts lapsing. Lower commission, as a result of fewer customers, and a focus on cost reduction also contribute.

Our net financial expense increased in the year primarily due to lower interest rates on cash held in Australia.

Statutory profitOur statutory profit was £374.3m, a 39% decline on 2014, impacted by non-trading items, as presented in the table above.

Most notably, due to ongoing funding pressures experienced by local authorities and the impending introduction of the

National Living Wage in the UK from April 2016, there has been a write down in the value of our Care Services UK business. This is comprised of a partial impairment of goodwill of £114.1m and a write down in the value of property and equipment of £179.7m, of which £67.8m has been recognised in the Income Statement, with the balance being taken to the revaluation reserve.

The return seeking assets generated lower gains of £7.0m (2014: £13.8m). We made various changes to our portfolio in 2015, which enhanced its risk return profile. In 2016, we will continue to actively manage the portfolio, consistent with our investment risk appetite and in line with our views of prospective asset class returns.

Receipt of deferred consideration of £25.5m in relation to the 2007 sale of Bupa Ireland increases the 2015 results. The comparative benefit of this is broadly offset by profits on disposal of Health Dialog, Surgichem and Continuing Care in 2014.

2015 also benefits from lower restructuring costs, with 2014 impacted by Bupa Global transformation in particular.

Non-underlying profit items (AER)

2015 £m

2014 £m

Amortisation of intangible assets arising on business combinations (46.5) (51.5)Impairment of goodwill and intangible assets arising on business combinations (114.1) (0.7)

Net property revaluation losses3 (61.7) (0.7)Restructuring costs (1.1) (14.5)Transaction costs on acquisitions and disposals (3.7) (5.4)Net (losses)/gains on disposal of businesses (0.1) 27.1Deferred consideration in relation to the sale of Bupa Ireland Limited 25.5 –Realised and unrealised foreign exchange (losses)/gains (10.5) 7.1Gains on return seeking assets, net of hedging 7.0 13.8

Other4 (3.0) (3.8)

Total non-underlying profit items (208.2) (28.6)

Underlying profitUnderlying profit has declined by 2% at CER despite increased profits in all Markets Units except Spain and Latin America Domestic.

Within our underlying profit is a £52m adverse non-cash adjustment under IFRIC 12 relating to our PPPs in Valencia and Madrid, due to the impact on our profit projections of customers from within our catchment area seeking treatment at other facilities, accentuated by the introduction of the Free Choice Act in Valencia in the year.

Despite the challenging trading conditions that persist in Australia and prior year profit benefiting from a change in regulation which enabled us to reduce our claims provisions, our Australia and New Zealand Market Unit achieved 2% profit growth (CER). This was driven by higher revenue in Health Insurance and supported

1.

2.

3.

4.

5.

Group total underlying profit1

£582.5m

2 Under IFRIC 12, which applies to service concession contracts such as PPPs, we use the average operating margin for the life of the contract (based on historic performance plus projections) as a means for recognising results. Once there is a change in performance compared to expectations, the operating margin is reassessed and an adjustment made to the current year results to bring the contract performance to date in line with the revised margin.

3 2015 includes a write down in Care Services UK of £67.8m, of which there is an equipment write down of £8.7m.

4 Includes central non-underlying items, impairment of investment in associate and net losses on disposal of fixed assets.

Page 26: Longer, healthier, happier lives

24Bupa Annual Report 2015

Strategic Report

24Bupa Annual Report 2015

Strategic Report

Financial review

TaxationBupa’s taxation expense of £96.0m (2014: £86.4m) represents an effective tax rate of 25.6%. The effective rate is higher than the UK statutory rate of 20% mainly due to goodwill impairments and property write downs, offset by prior year credits.

Stripping out the impairments, write downs and prior year credits, Bupa’s 2015 current year effective tax rate is 23.7%, reflective of the prevailing corporate tax rates in the markets we operate in, ranging from 16.5% to 35%.

FundingWe manage our funding prudently to secure a sustainable platform for our continued growth. A key element of our funding policy is to target an A-/A3 senior credit rating for Bupa Finance plc, the main issuer of Bupa debt, over the long term.

In 2015, there was a change to our Bupa Finance plc rating by Moody’s from Baa2 (stable) to Baa2 (positive). The Fitch rating was unchanged at A- (stable).

Our continued focus on cash generation and repatriation enabled us to fund growth in the business and end the year with an undrawn £800m committed bank facility as well as holding £163m cash centrally.

We focus on managing leverage in line with our rating target. Leverage remained steady throughout the year, notwithstanding adverse currency movements and impairments impacting Bupa’s net assets. At year end, leverage stood at 27.7% (2014: 27.6%), compared to 28.0% at half year.

We have given notice, on 29 February 2016, to redeem our existing £235m care home securitisation via the early redemption option, funding through cash and bank borrowings.

Cash flowNet cash generated from operating activities remains strong at £788.1m (2014: £789.5m). This reflects the impact of the weakening Australian dollar on foreign currency operating cash flows offset by an increase in accommodation bond receipts in Australia due to regulatory change and accelerated opening of new homes in the year.

Solvency II Capital Position

2015£bn5

Own Funds 3.1

Solvency Capital Requirement 1.7

Surplus/(Deficit) 1.4

Solvency Coverage Ratio 180%

During the year we acquired a further 17.3% interest in Bupa Chile for £59.2m, building on our original acquisition of  56.4% in February 2014, which took our ownership to 73.7% at 31 December 2015. We issued a Mandatory Tender Offer for the remaining shares in the company, which closed in January 2016, increasing our shareholding to 99.7%. We acquired the final 0.3% shareholding in February 2016, bringing our ownership of Bupa Chile to 100%.

We also invested £386.4m in capital expenditure across Bupa including the continued expansion and refurbishment of our care homes.

Overall cash and cash equivalents increased marginally to £1,194.1m (2014: £1,187.6m). These funds, in addition to our financial investments and longer-term deposits, continue to be managed conservatively, in line with a clearly articulated risk appetite. We actively manage our counterparty exposures as part of our ongoing risk management, and cash is only invested with counterparties rated A/A2 or higher, unless approved by the Investment Committee.

Bupa is conservative in its investment management and has a preference for low-risk asset classes, with modest holdings of corporate and other bonds. Therefore it is not significantly exposed to market movements.

Solvency Bupa maintains regulatory capital in line with its capital management objective as set out in note 5.3.

At 31 December 2015, the Insurance Group Directive (IGD) regime applied. Bupa’s IGD capital resources were £2.3bn (2014: £2.6bn), which was in excess of a capital requirement of £0.9bn (2014: £0.8bn). This represented a solvency coverage ratio of 267% (2014: 319%).

Since 1 January 2016, the Group has been subject to the Solvency II Directive which supersedes the IGD and requires the Group to hold sufficient eligible Own Funds (‘Own Funds’) to cover its Group Solvency Capital Requirement (SCR) which takes account of all the risks in the Group, including those related to non-insurance businesses. The Solvency II surplus capital as at 31 December 2015 is £1.4bn5.

Own Funds

Reconciliation of IFRS equity toSolvency II Own Funds

2015£bn5

IFRS equity attributable to Bupa 5.4

Goodwill and intangibles (2.9)

Valuation differences (0.1)

Pension surplus adjustment (0.2)

Subordinated debt 0.9

Solvency II Own Funds 3.1

The key items of the reconciliation are:

° Goodwill and intangibles on the IFRS balance sheet are not recognised as Own Funds under Solvency II

° Subordinated debt is treated as Own Funds under Solvency II but as a liability under IFRS

° Pension surplus in excess of the pension risk contribution to the SCR is not included in Own Funds.

Capital Structure

2015£bn5

Unrestricted Tier 1 2.2

Restricted Tier 1 0.4

Tier 2 0.5

Own Funds 3.1

The Group’s Own Funds comprise the net assets valued on a Solvency II basis, exclusive of any non-controlling interests, together with eligible subordinated debt. The Group has £330m (fair value £382m) of callable subordinated perpetual guaranteed bonds and a £500m (fair value £502m) dated hybrid bond which matures in April 2023. These bond issues are accounted for as debt in the financial statements, but are treated as solvency capital for regulatory and management purposes.

Page 27: Longer, healthier, happier lives

25Bupa Annual Report 2015

Strategic Report

25Bupa Annual Report 2015

Strategic Report

The single largest risk component of Bupa’s SCR is property risk which primarily relates to care homes in the UK, Australia, New Zealand and Spain.

Market risk sensitivitiesThe following analysis is provided to show the relative sensitivities of Bupa’s estimated solvency coverage ratio as at 31 December 2015 to changes in market conditions. These sensitivities are all independent stresses to a single risk and do not take into account management actions or represent Bupa’s expectation of future market conditions.

Reducing carbon emissionsIn 2010, we made an ambitious commitment to reduce our absolute carbon footprint by 20% by the end of 2015. We have successfully reduced our global carbon emissions by 23%; from 198 ktCO2e7 in 2009 to 152 ktCO2e last year. This is calculated on an absolute basis against a backdrop of significant business growth. Our 2015 and 2009 carbon footprints have been verified by the Carbon Trust and are in accordance with the measurement requirements of the Carbon Trust Standard and Greenhouse Gas Protocol – the global standard of measurement.

In 2015, we continued to execute energy efficient and renewable projects across our Market Units. During 2014 and 2015 we invested £50 million through our Energy Saver Fund to support over 950 low-carbon technology projects and renewable energy projects in Bupa buildings in Australia, the UK, Spain, New Zealand, Poland, Hong Kong and India. These investments show that we can contribute significantly to reduced carbon emissions, and still grow as a business. We now have over 100 solar installations in the UK, and are the largest operator of rooftop solar in Australia. We have also continued to purchase electricity from certified renewable sources. In Spain we source over 99% of our electricity in this way, and overall 35% of our global electricity needs are from green sources.

Our investments also provide long-term financial returns. To secure funding, projects needed to demonstrate not only energy savings, but also a financial return. We ensured projects delivered a positive impact on our financial performance, the planet and the health of the world. This is just one example of how we are embedding ‘purposeful performance’ across Bupa in service of our purpose: longer, healthier, happier lives.

OutlookLooking forward, we will continue to focus on growing and developing our businesses, driving operational efficiencies across Bupa whilst maintaining a strong capital position under Solvency II and managing our funding to ensure a sustainable platform for continued growth.

Solvency Capital Requirement5

The Group SCR is calculated in accordance with the Standard Formula specified in the Solvency II legislation. Bupa has obtained approval from the Prudential Regulation Authority to substitute the insurance premium risk parameter in the formula with an Undertaking Specific Parameter (USP) which reflects Bupa’s own loss experience. Replacing the standard parameter for insurance premium risk with our own reflects the lower risk that Bupa’s size, experience and geographic diversification brings.

Analysis of the SCR5

1.

8.

2.3.

4.

5.

6.

7.

%Risk Diversification  

1. Insurance risk 25% Market risk 60%

2. Spread 3%3. Equity 1%4. Property 31%5. Currency 12%6. Pension Scheme 13%

7. Counterparty risk 3%8. Operational risk 12%

Carbon Emissions (2009-15) (kt CO2e)

200

150 

100

50

02009

Carbon emissions

Carbon reduction

2010 20122011 2013 2014 2015

Carbon emissionsavoided through renewable energy purchase

20% reduction target

Solvency Coverage Ratio

Interest rate +/– 100bps

Credit spreads + 100bps assuming no credit transition

Equity markets – 20%

Property values – 10%

GBP appreciates by 10%

Pension risk +10%6

200%

180%

180%

180%

169%

176%

177%

150%100%

180%

Market risk sensitivities

5 The Solvency II Capital Position (Own Funds and Solvency Capital Requirement) and related disclosures are estimated values.

6 The pension scheme surplus in excess of the pension risk contribution to the SCR is sufficient to cover the sensitivity analysis stress such that the Group solvency capital surplus is unchanged.

7 Kilo tonnes of equivalent carbon dioxide.

Page 28: Longer, healthier, happier lives

26Bupa Annual Report 2015

Strategic Report

26Bupa Annual Report 2015

Strategic Report

Risk framework and governanceWe adopt a ‘three lines of defence’ approach to risk management. The first line of defence entails management and staff in our Operating Units, our Market Units, Business Units and the Centre, being responsible for the identification and management of their risks. In each Market Unit, executive risk committees, chaired by Market Unit Managing Directors scrutinise their risk profiles and generate mitigating actions where necessary. This process culminates in the Bupa CEO chairing an enterprise-wide committee, the Bupa Enterprise Risk Committee (BERC), which brings the whole picture together. The BERC own the whole of Bupa’s risk profile and are responsible for risk culture. For some key categories of risk there are specific risk forums. These include the Clinical Governance and Quality Steering Committee, shown on page 48.

The second line of defence is comprised of risk management professionals both at the Centre and within Market Units. Their role is to advise and challenge the first line on risk issues and to collate reports for management and the Board on their independent views on risk issues.

The third line is Internal Audit. Bupa has a global Internal Audit led by the Chief Internal Auditor at Centre. Internal Audit is responsible for providing assurance over the effectiveness and adequacy of governance, risk and controls, including the activities undertaken by the first and second lines in accordance with the Global Internal Audit Plan approved by the Board Audit Committee. Further information on the activities of third line are outlined on page 45.

Each of the large insurance entities has a Board Risk Committee composed entirely of independent Non-Executive Directors to oversee the execution of the risk management framework. Subsidiary boards receive reports from local management and local Risk Directors. The Bupa Board Risk Committee sees the minutes from subsidiary board committees, the BERC, and receives reports from the Chief Risk Officer and other Bupa executives as appropriate. It is accountable for the oversight of risk by the Board and recommends risk appetite to the Board for approval.

Our business standards and policies define the way we do business and apply to the whole of Bupa. These standards and policies are reviewed on an annual basis.

Our risksThe risk profile of Bupa differs across our Market Units and between the funding of and the delivery of healthcare. Bupa’s geographic reach also exposes us to a wide range of political, legal and economic contexts. We manage the risks to Bupa as a whole by understanding the risk drivers for our individual Business Units and our balance sheet and assessing how they interact. By understanding the risks we face, we seek opportunities to benefit from risk diversification, to identify emerging risks and to understand and manage any concentrations of risk.

The most significant quantifiable risks facing Bupa are: property risk arising from our provision businesses, chiefly UK care homes; insurance risk reflecting the potential volatility of claims experience in our insurance businesses, and; exchange rate risk reflecting our global presence and the volatility of FX rates. Finally, operational risk brings together a number of diverse risks including cybersecurity risk and clinical risks.

Other significant risks we face include those that cannot readily be quantified, such as the risks to brand value and reputation, and the potential impact of future changes in government and regulatory policy.

During 2015 prudential supervision of our Australian insurance business transferred to a new regulator, APRA. In 2016, we will be monitoring any changes to the regulatory regime and potential impact on Bupa.

Risk appetiteOur Board risk appetite reflects Bupa’s purpose and expresses the degree of risk we are prepared to accept as we work to deliver on our strategy.

Our core risk appetite statements are focused on:

° management of our financial strength;

° how we treat our customers and employees;

° the sustainability of our business; and

° internal controls and operational risk.

Our risk appetite statements are a central reference point for key decisions and provide a governance and assessment framework for these decisions. They are not intended to automatically prevent activity outside of Bupa’s risk appetite, but rather to help identify such instances in a timely manner so that the Board can consider its response.

Risks and uncertainties

Gerry Kelly Chief Risk Officer

Delivering our purpose involves taking and accepting risks. Understanding our risks

well allows us to make the best decisions for our

customers, our people and Bupa. This enables us to deliver Bupa’s purpose

sustainably into the future.

Page 29: Longer, healthier, happier lives

27Bupa Annual Report 2015

Strategic Report

27Bupa Annual Report 2015

Strategic Report

Bupa risk governance structure

Bupa Board

Market Unit Clinical Governance and Quality

Committees

Global Clinical Governance and Quality

Steering Committee

Market Unit Risk Committees

Local/Regulated Entity Risk Committees

Bupa Enterprise Risk Committee (BERC)

Local/Regulated Entity Boards

Board Risk Committee

Reporting line from a formal sub-committee

Provides regular reporting

Senior insurance managers’ regimeBupa fully supports the UK Prudential Regulation Authority’s (PRA) expectation that those who run UK insurance firms should behave with integrity, honesty and skill, and have clearly defined responsibilities. A new individual accountability regime for UK insurers has been introduced by the PRA and the Financial Conduct Authority (FCA), aligned to broader regulatory reform in the UK and the provisions of EU Solvency II regulation.

The new regime has introduced higher standards that must be met by individuals, further strengthening good governance and risk management. The most senior executives and non-executives have to be pre-approved by the PRA and the FCA,

and have a number of new prescribed responsibilities allocated to them. A broader population of senior leaders, which includes those holding and performing ‘key functions’, are now subject to new conduct standards and enhanced checks on their ‘fitness and propriety’ to perform their roles.

The new regime requires organisations to develop and maintain a governance map, showing the responsibilities and lines of accountability of senior managers in the UK insurer, and in the wider Bupa group.

We have enhanced processes and controls to ensure we meet the new standards of ‘fitness and propriety’, conduct and accountability.

First line of defence

Second line of defence

What we did in 2015During 2015, we continued to strengthen our risk management approach and capability in response to Bupa’s growth and the increasing expectations of our regulators around the world. Readiness for the implementation of the Solvency II Directive has been a particular focus. This has involved embedding all aspects of our risk management framework, including: our policies; updating our risk appetite statements; continuing to strengthen the skills and capabilities in our businesses and risk and audit functions; and enhancing our ongoing reporting, particularly in regards to internal controls assessments and conduct risk reporting.

Managing cybersecurity riskThe current environment means no organisation is safe from cybersecurity threats. We have closely monitored the rising frequency, sophistication and impact of cyber threats to the healthcare sector, and in response we have embarked on a global cybersecurity improvement programme. This began with an assessment of our readiness, both in our technical capability and our people and processes, against scenarios closely modelled on recent large-scale breaches at other companies.

This work is being used to identify improvement opportunities across a range of capabilities, including cybersecurity, incident response and crisis management, people capabilities and post-incident customer care. Where we identify opportunities to improve, we will do so to ensure we reliably and rapidly identify, manage and defeat these threats.

Page 30: Longer, healthier, happier lives

28Bupa Annual Report 2015

Strategic Report

Key: H   High inherent exposure to this risk. M   Moderate inherent exposure to this risk. L  Low inherent exposure to this risk.

Risk Comment and outlook

Australia and

N

ew Z

ealand

UK

Sp

ain and

Latin Am

erica

International

Develo

pm

ent M

arkets

Bup

a Glo

bal Mitigating actions

Property riskRisk of devaluations in property markets leading to a material devaluation of Bupa’s property portfolio such as head offices, hospitals and care homes.

Bupa generally owns rather than rents property, which keeps lease commitments down but leaves Bupa exposed to falls in property values.

If Bupa expands its care provision businesses and, if properties are owned rather than leased, its property risk exposure would increase.

H H M L L By maintaining a geographic spread of businesses across the globe, Bupa is able to diversify exposure to individual property markets.

Property risk is factored into any acquisition appraisal.

Care Home valuations are based on underlying profitability of the individual homes.

Insurance riskRisks relating to Bupa’s insurance businesses. Risks of inadequate pricing and/or underwriting of insurance policies, and of claims experience being materially adversely different to expectations.

Bupa’s health insurance is short-tailed with lower outstanding claims as a percentage of revenue than most general insurers.

Bupa retains most of its insurance risk rather than reinsuring.

Insurance risk exposure will grow with planned growth in premium income of the funding businesses.

H H H M H The relatively short-tailed nature of Bupa’s products allows Bupa to respond to market changes quickly.

Bupa has extensive control mechanisms in place to mitigate against the risk of higher than expected claims costs.

The geographical diversity of Bupa provides further mitigation against insurance risk.

Currency riskRisk arising from changes in the level, or volatility, of currency exchange rates impacting on cash flows and assets held in currencies other than sterling, and on the financial statements.

As the net assets of businesses outside the UK grow there will be a corresponding increase in currency risk in relation to translation into sterling.

There is transactional risk relating to policies where premiums and claims are in different currencies.

H L M M M Currency risk is partially mitigated through a hedging programme.

Asset liability matching in local currencies helps ensure that sufficient funds are held in the local currency therefore limiting currency risk exposure.

Credit spread and counterparty default risksRisk of a loss in value of bond assets and/or that a counterparty fails to meet its obligations in the face of difficult economic conditions. This also includes the risk of a loss in value of the bond assets held within the Pension Schemes.

Bupa’s funding businesses have modest holdings of corporate and other bonds. These are exposed to the risk of widening spreads and defaults.

There is banking counterparty default risk in respect of cash on deposit.

M H M L L Bupa’s bond portfolio is small in relation to its other financial assets.

Counterparty exposure is managed by dealing with highly rated counterparties with exposure limits as per Group Treasury Policy. In addition, Bupa does not permit securitised lending of its assets.

Operational risk (including conduct risk and clinical risk)Risk of loss arising from inadequate or failed internal processes, or from personnel, systems or external events.

This includes: conduct risk – the risk that Bupa’s behaviour or actions result in unfair outcomes or detriment for customers;

clinical risk – the risk of injury, loss or harm due to a failure of clinical care, or inadequate governance, of the clinical networks used when funding treatment through health insurance.

We are committed to managing operational risk effectively. This includes continued close attention to management of regulatory risk and proactive engagement with regulators.

The inherent regulatory compliance and conduct risk profile for Bupa is high due to extensive geographical footprint, the increasing cybersecurity threat, and the volume of regulatory change.

As Bupa expands its care provision businesses, there will be an increase in inherent exposure to this risk. This is being actively managed through continued refinement of our approach to clinical risk governance.

Clinical risk is highest rated in the ANZ, UK and SLA MUs due to the size of the healthcare provision businesses. It is lowest rated in Bupa Global due to its focus on the funding business.

H H H H H Whilst Bupa has a low tolerance for operational risk arising from the health funding and health provision business that it conducts, it seeks to minimise operational risk where it is cost effective to do so.

Maintenance of robust internal control processes and governance frameworks, the approval of risk policies, and the assessment of compliance helps mitigate this risk.

All Market Units have a Medical Director responsible for ensuring clinical quality and governance within the business. They are accountable to the Chief Medical Officer (CMO) for clinical governance.

Our structure of clinical risk committees means that there is oversight both within Market Units and across Bupa. This oversight is informed by quarterly reporting of key quality indicators.

The table below reflects the main risks for which Bupa holds economic capital.Risks and uncertainties

Liquidity risk is addressed not by capital but by holding liquid assets and through controls. With policyholder liabilities predominantly backed by cash, Bupa’s liquidity risk exposure primarily relates to the funding risk associated with borrowings. This is mitigated by the Treasury Function actively managing borrowings, where the amount and timing of outflows are known, and maintaining a portion of the Bank Facility undrawn.

Page 31: Longer, healthier, happier lives

29Bupa Annual Report 2015

Strategic Report

Risk Mitigating actions

Governance of information and dataRisk that failure in our policies and controls over the management and security of information and data may result in Bupa not being able to achieve its strategic outcomes. It may cause harm to Bupa’s customers and employees, financial loss, regulatory censure or damage to Bupa’s reputation.

Bupa is mitigating this risk through the finalisation and implementation of a new information risk operating model worldwide. This project is being led by the Chief Information Officer.

UK aged care sectorRisk that external market and consequent commercial challenges faced in the UK lead to a further write down in the value of the UK care home properties and an associated adverse impact on the regulatory capital coverage and financial performance.

The UK care home market is, at present, impacted by the funding pressures being experienced by local authorities. The introduction of the National Living Wage (NLW) is adding to these challenges.

A structured transformation programme is planned to drive key initiatives into the business and secure benefits to potentially mitigate the impact of the NLW.

Bupa is increasingly taking a firmer line when negotiating contracts with local authorities to ensure we recover the true cost of caring for our residents.

A review of potential agency cost reductions through cross-functional support teams and functions is also being considered.

Organisational capacity and capabilityBupa’s growth agenda brings with it increased risk of failure to manage the overall volume and pace of organisational change.

This could lead to excessive management stretch, inadequate capability within the organisation and failure to identify and manage key risks.

This is an important area of focus for the Bupa Enterprise Risk Committee which owns the risk culture and drives action in relation to the factors that influence it.

Management of transformational change is a key leadership accountability. Leaders are supported in this with specific change management resources and by the results of a regular Global People Survey which aims to capture the views of as large a proportion of Bupa people as possible.

Government and regulatory policy changeThe risk that change to government or regulatory policy undermines the viability of the business model or reduces profitability.

Bupa continuously tracks political/economic events and analyses their potential impact on our business.

The impact of the NLW in the UK continues to be closely monitored with actions taken to seek to mitigate the impact.

In Australia, Bupa continues its engagement with government departments and key figures on changes that affect the market it operates in, including the current proposed reform of the private medical insurance market.

Market and competitor activityThe risk that Bupa fails to identify threats from competitor innovation, competitor pricing strategies, new market entrants, changing customer demand, and changing market economics, and the risk that Bupa fails to identify and effectively exploit opportunities.

Bupa continues to explore partnership/collaboration opportunities to generate new sources of business. Market activity is monitored to identify new potential threats and opportunities.

Current principal risks and uncertainties The table below lists the main risks and uncertainties that are of the greatest concern and debate for the Board and Enterprise Risk Committees.

Page 32: Longer, healthier, happier lives

30Bupa Annual Report 2015

Strategic Report

The directors have assessed the ability of Bupa to continue in operation and meet its liabilities as they fall due over a period of three years.

The three-year assessment period was chosen to align with the internal strategic planning process. The planning process considers all key financial and capital metrics over the period. The plan is also stressed for risks facing individual Business Units, as well as for global macro risks impacting Bupa as a whole.

The Bupa own risk solvency assessment (ORSA) considers the appropriate level of capital that is required to meet overall solvency needs over the planning period, given the current risk profile and the strategy articulated in the Bupa business plan and risk appetite statements. It considers all risks to Bupa and covers Bupa as a whole. This assessment concluded that Bupa’s strategy and business plan are sound and that Bupa has sufficient capital and liquidity to continue to meet regulatory capital requirements and Bupa’s capital risk appetite over this period.

As part of the assessment of the viability of Bupa, the directors have considered the financial performance, capital management, cash flow, solvency and the future outlook. Bupa is well capitalised now and is expected to continue to remain so over the plan period. Our insurance businesses are cash generating and therefore we expect to be able to settle liabilities as they fall due. Bupa has no shareholders and therefore has no requirement to pay dividends. Instead Bupa can invest in growing organically and through acquisitions.

The directors considered each of the principal risks and uncertainties set out in ‘Risks and uncertainties’ on page 26 which include those that would threaten its business model, future performance, solvency or liquidity. They are satisfied that we have appropriate risk management and governance procedures in place to manage and mitigate these over the plan period. The recent enhancements to Bupa’s governance structure and the robust, regular reviews through the Internal Control Risk Management Assessment Framework (ICRMA) process give comfort in this regard.

Based on the results of this analysis and the regular risk and capital reporting processes, the directors have a reasonable expectation that Bupa will be able to continue in operation and meet its liabilities as they fall due throughout the three-year planning period up to 31 December 2018.

The going concern assessment within the Basis of Preparation in the financial statements section sets out Managements’ detailed assessment. As part of this assessment details are provided on Bupa’s revolving credit facility and Bupa’s short-term liquidity position.

Longer-term viability

statement

Page 33: Longer, healthier, happier lives

31Bupa Annual Report 2015

Governance Report

Corporate Governance is what the Board of a Company does

and how it sets the values of the Company.

The UK Corporate Governance Code 2014 (the Code) sets

out a framework to facilitate effective, entrepreneurial and

prudent management that can deliver the long-term success

of the Company.

At Bupa we aim to comply with the same governance

standards as FTSE 100 companies.

Chairman’s introduction to governance 32

The Board of Directors 34The Executive Team 36Leadership 38Effectiveness 41 Engagement 43 Audit Committee Report 44 Risk Committee Report 47 Nomination & Governance Committee Report 49Medical Advisory Panel 50

Remuneration Report 51

Policy 52Implementation (audited) 56

Report of the Board of Directors 61

Statement of Directors’ Responsibilities 62

Governance

Page 34: Longer, healthier, happier lives

32Bupa Annual Report 2015

Governance Report

The Board closely monitors developments in corporate governance and assesses how these can be applied to Bupa.

For example, revisions to the UK Corporate Governance Code (the Code) were published in 2014. Among the changes was the implementation of Lord Sharman’s recommendations on going concern and risk management. As a result, we have included in this year’s strategic report, for the first time, a longer-term viability statement using the three year timeline in our internal strategic planning process as a basis for an appropriate time frame. The statement helps our readers to understand how we manage going concern and liquidity risks to ensure Bupa’s long-term success. The Board recognises that a balanced risk appetite is essential for a successful organisation and receives regular recommendations and reports from the Risk Committee, including on our compliance with Bupa’s risk appetite statements (see page 48 for more details). Another response to the Code changes was the further strengthening and monitoring of Bupa’s internal control and risk management systems by the Audit Committee. The Audit Committee monitors this process, and the actions taken to address areas identified, on behalf of the Board.

In 2012, Bupa established our 2020 strategic vision outlining how we will fulfil our purpose: longer, healthier, happier lives (see inside front cover for more information). The Board tracks Bupa’s performance against eight key performance indicators, which are aligned with our vision, and the progress made against them this year is outlined on pages 16-17.

During the year, the Board oversaw the rearticulation of Bupa’s core values designed to create an extraordinary culture and organisation in order to fulfil our purpose and to help millions of people enjoy better health. For more information see page 15.

Bupa aligns its remuneration policy with performance and strategy by incentivising our Executive Directors and senior management to focus on the long term and fulfil our purpose. The Directors’ Remuneration Report on page 51 gives further detail on how this has been applied within Bupa.

Our governance arrangements continue to be reviewed in line with developments in best practice.

Board composition and succession planningGeorge Mitchell and John Lorimer retired from the Board at the conclusion of the AGM on 14 May 2015 and 30 June 2015 respectively. George Mitchell was also the Senior Independent Director (SID) and a member of the Audit, Nomination & Governance, Remuneration, and Risk Committees. Upon George’s departure, Lawrence Churchill was appointed to the position of SID. John Lorimer was the Chair of the Audit Committee and a member of the Risk Committee. He continues as a Non-Executive Director (NED) of a number of Bupa subsidiaries. The Board extends its gratitude to George Mitchell and John Lorimer for their years of service, and invaluable contribution.

Clare Thompson was appointed to the Board as a NED and as a member of the Risk and Audit Committees on 1 May 2015. She was appointed Chairman of the Audit Committee on 1 July 2015. She possesses deep experience from her executive career in professional services, latterly as a lead audit partner with PwC, specialising in the insurance sector.

Roger Davis was appointed on 16 July 2015 as a NED and as a member of the Audit and Risk Committees on 17 September 2015. He brings extensive business and international experience to the Board after a wide-ranging career in financial services.

The continued review, development and implementation of our succession plans will ensure an orderly refreshment of the Board and continuity when NEDs come to the end of their tenure.

During 2015, the Board considered its composition as part of its regular succession planning review. As part of our ongoing aim to broaden the diversity of experience, we also appointed Simon Blair and Janet Voûte as NEDs with effect from 12 January 2016. Their international experience and understanding of the insurance and health and care sectors complements the skill-set of existing Board members.

Rita Clifton will step down at the conclusion of the AGM on 11 May 2016 as she reaches the end of her tenure. The Board expresses its thanks to Rita for her six years of service as a NED, and as a member of the Remuneration and Nomination & Governance Committees, as a member of the Medical Advisory Panel and for her valued advice and perspectives.

We aim to operate to the same

standards required of FTSE 100 companies.

Lord LeitchChairman

Chairman’s introduction

to governance

Governance continued

Page 35: Longer, healthier, happier lives

33Bupa Annual Report 2015

Governance Report

Statement of complianceAs part of our commitment to excellence, we aim to operate to the same governance standards as required of UK FTSE 100 companies. We have applied the main principles and complied with all of the relevant provisions of the Code throughout 2015 except section C.3.7: Audit Committee and Auditors, where Bupa has not yet placed its audit out to tender, with KPMG having been in post for over 20 years. The Board was satisfied that KPMG continued to be independent and agreed that it would be likely to be disruptive to place the audit out to tender during 2015, at a time when Bupa was preparing for the implementation of Solvency II. Bupa is monitoring the impact of new legislation from the EU on compulsory auditor rotation and the Audit Committee will consider this during 2016.

The Corporate Governance Report on pages 32-50, together with the Remuneration Report on pages 51-60, describe how we have applied the main principles of the Code during the year.

Lord Leitch Chairman

Association MembersAt the end of 2015, there were 116 Association Members (AMs) whose role is to hold the Board to account. They fulfil a crucial oversight role, providing challenge to the Board on matters of strategy and performance. During the year, we appointed 24 new members, resulting in 21% of AMs now having extensive experience of operating outside of the UK. In doing so, the AMs are very well equipped to challenge the Board across the breadth of our business.

In the spirit of the Code, we provided a number of opportunities for AMs to engage with Bupa throughout the year. The CEO, Chairman and SID are also available to answer questions on an individual basis. We ensure that AMs are kept informed of Bupa’s strategy and performance and that their views are heard and communicated to the Board and to relevant teams throughout the business. For more information on how Bupa engages with our AMs please see page 43.

Diversity StatementWe are pleased to report, that at the year end, 33% of our Board was female. We have surpassed Lord Davies’ recommendation that by 2015, boards of FTSE 350 companies should aim for 25% female representation. Women are also well represented in management positions throughout the business, at 31% of the Executive Team at year end. We actively encourage initiatives within the organisation which seek to enhance the pipeline of women at senior levels. Gender is, however, only one measure and Bupa believes diversity should be considered more broadly. Our Board diversity policy can be found on bupa.com and is covered in more detail on page 40 of this report.

Page 36: Longer, healthier, happier lives

34Bupa Annual Report 2015

Governance Report

The Board of Directors

Governance continued

Rita Clifton, CBE Independent Non-Executive Director

N/Re Joined the Board in July 2010 and was a member of the Medical Advisory Panel during 2015. Rita is an expert in brand management, marketing, strategy and sustainability. Formerly Chief Executive and then Chairman of Interbrand UK, Rita is currently on the Board of Nationwide Building Society and ASOS Plc and is Chairman of Populus, the opinion pollster, and of BrandCap. Before this, she was Vice Chairman and Strategy Director at Saatchi & Saatchi. Previous board appointments have included Judge Business School in Cambridge, EMAP plc and Dixons Retail plc. She also served on the Sustainable Development Commission, is a Fellow of WWF-UK and a visiting Professor of Henley Business School. Rita will step down from the Board at the AGM on 11 May 2016.

Roger Davis Independent Non-Executive Director

A/Ri Joined the Board in July 2015. Roger has extensive business experience and an international mindset acquired during a wide-ranging career in financial services. He is Chairman of Gem Diamonds, Sainsbury’s Bank, Global RadioData Communications (GRC) and Future for Heroes. Roger is also a Non-Executive Director of Experian. He has extensive experience in the UK and Asia with previous positions including Managing Director of India for Jardine Fleming, Chief Executive Officer of BZW Asia Pacific, and Chairman and Chief Executive of Barclays Capital Asia Pacific. He left Barclays as Executive Director and Head of the UK Bank in 2005.

Lord Leitch, Chairman Non-Executive Chairman

N(Chair)/Re Joined the Board in May 2005; appointed Chairman in November 2006. Lord Leitch has a deep and broad knowledge of insurance and financial services gained over four decades as a senior executive in a number of major international businesses. Lord Leitch is currently Chairman of Intrinsic Financial Services, Chairman of FNZ (Group), Non-Executive Director of Old Mutual Wealth, and member of the House of Lords. Previously Deputy Chairman of Lloyds Banking Group plc, Chairman of Scottish Widows plc, Senior Independent Director at United Business Media plc, Chairman and Chief Executive Zurich Financial Services UK, Ireland, South Africa and Asia Pacific, and Chairman of the Association of British Insurers.

Stuart Fletcher, Chief Executive Officer Executive Director

N Appointed CEO in March 2012. He has over 25 years’ experience in senior management and a strong international track record having lived and worked in Japan, USA and Hong Kong. Stuart is accomplished in setting and executing growth strategies, developing strategic partnerships, embedding employee engagement, and leader and team capability development across complex and international businesses. He is currently an Advisory Board Member for the Wellcome Trust Centre for Human Genetics, Oxford University. Stuart joined from Diageo where, most recently, he was President, Diageo International. Other senior management positions at Diageo included Global Finance Director of Guinness. He previously held financial roles at Procter & Gamble and United Glass.

COMMITTEE KEY

A  Audit Committee

N  Nomination & Governance Committee

Re  Remuneration Committee

Ri  Risk Committee

Martin Houston Independent Non-Executive Director

Re(Chair)/A/Ri Joined the Board in January 2014. Martin brings extensive international business experience to the Board. He is Chairman of TPH International and Parallax Energy and is a Non-Executive Director of CC Energy Development. Previously Martin was Chief Operating Officer and Executive Director of BG Group plc where he spent 30 years. He is a Fellow of the Geological Society of London, is on the advisory board of the Royal Opera House of London and is a former Non-Executive Director of Severn Trent plc.

Page 37: Longer, healthier, happier lives

35Bupa Annual Report 2015

Governance Report

Clare Thompson Independent Non-Executive DirectorA (Chair)/Ri

Joined the Board in May 2015. Clare brings a wealth of experience, particularly in the areas of finance and insurance. She is also a Non-Executive Director of Direct Line Group and Retail Charity Bonds plc, a Non-Executive member of the Partnership Board of Miller Insurance Services LLP and a Trustee and Treasurer of the Disasters Emergency Committee. Clare was a Partner at PricewaterhouseCoopers (PwC) from 1988 until 2011. Whilst she was at PwC, she held several senior and high profile roles, particularly within the insurance sector. Clare is a Fellow of the Institute of Chartered Accountants in England and Wales.

Evelyn Bourke, Chief Financial Officer Executive Director

Appointed CFO in September 2012. Evelyn has a strong track record and extensive experience in financial services, risk and capital management, and mergers and acquisitions. A qualified actuary, she also holds an MBA from London Business School and is a Non-Executive Director of the IFG Group in Ireland. Evelyn joined from Friends Life where she was Chief Executive Officer of its Heritage division. Previously at Friends Provident, she was the Executive Director responsible for strategy, capital and risk and, before that, Chief Financial Officer.

Lawrence Churchill, CBE Senior Independent Director

Ri(Chair)/A/N/Re Joined the Board in July 2009 and became the SID on 14 May 2015. Lawrence brings considerable expertise from operating in large, complex organisations and has extensive knowledge of financial services, risk management, general management and public policy. Lawrence is Chairman of the Board of the Financial Services Compensation Scheme, Chairman of Applegate Marketplace Limited, Chairman of the Independent Governance Committee of Prudential Assurance Company and a Trustee of Prudential Corporate Trustee Limited. Previously Chairman of the NEST Corporation and the Pension Protection Fund, a member of the Board for Actuarial Standards, Chief Executive of Zurich Financial Services UK, Executive Chairman of UNUM and CEO of NatWest Life and Investments.

Professor Sir John Tooke Independent Non-Executive Director

Ri Joined the Board in July 2009. Sir John was Chairman of the Medical Advisory Panel during 2015. He brings his medical expertise, gained over 40 years, to advise the Board on clinical governance and advances in healthcare practices and treatments. A consultant physician, Sir John is immediate past President of the Academy of Medical Sciences. He chairs the Centre for the Advancement of Sustainable Medical Innovation, joint between UCL and Oxford University, and is Executive Chairman of Academic Health Solutions Ltd.

Simon Blair Independent Non-Executive Director

Joined the Board in January 2016. Simon brings international experience, particularly gained in Australia and New Zealand, and a strong understanding of the insurance and healthcare sectors. He is a Non-Executive Director of the Bank of Hangzhao, Sovereign Assurance, ASB Bank and BoCommLife. Simon was Group Executive International Financial Services for the Commonwealth Bank of Australia. He was previously Chief Operating Officer at Australian health insurer, Medibank, Lead Health Specialist for the World Bank, and CEO of Inner & Eastern Healthcare Network, then Australia’s largest public hospital group.

Janet Voûte Independent Non-Executive Director

Joined the Board in January 2016. Janet brings an international perspective and experience gained in corporate strategy and the health and care sector. She is Global Head of Public Affairs at Nestlé SA and Chairman of the Creating Shared Value Council focusing on nutrition, water and rural development. Janet is a board member of Bamboo Finance SA and the International Integrated Reporting Council. She previously served as Partnership Advisor at the World Health Organization in the area of non-communicable diseases and mental health and as CEO of the World Heart Federation. Janet was formerly Vice President and Partner at Bain & Company.

Page 38: Longer, healthier, happier lives

36Bupa Annual Report 2015

Governance Report

The Executive Team

Governance continued

Stuart Fletcher Chief Executive Officer

Stuart was appointed as CEO in March 2012. He has extensive experience of leading complex international organisations. Stuart was previously President, Diageo International between 2004-2011 and held various senior management roles with Diageo as well as financial roles with Procter & Gamble.

Evelyn Bourke Chief Financial Officer

Evelyn was appointed as CFO in September 2012. Evelyn is a qualified actuary with an MBA from London Business School with significant experience in financial services, including Standard Life, Friends Provident/Life plc, Chase de Vere Investments plc (an IFA) and Tillinghast-Towers Perrin.

Robert Lang Managing Director, Bupa Global

Robert joined Bupa in February 2013. Robert holds an MBA from London Business School and Economics and Arts (Hons) degrees from Monash University. Robert has extensive international experience in the insurance sector spanning Australia, Europe and Asia.

David Fletcher Managing Director, International Development Markets (IDM)

David joined as Chief Internal Auditor in March 2014 and has been Managing Director of IDM since September 2014. David has extensive international financial services experience, having held various senior positions in Nigeria, China, Hong Kong, Singapore, Indonesia and London.

The Bupa Executive Team (BET) is comprised of the CEO, who chairs the meetings, the CFO, the Managing Directors of the five Market Units and all Global Functional Directors.

The BET meets around nine times per year to focus on a global strategic agenda. This provides context to the specific responsibilities for performance and managing risk that each BET member has in their individual roles. In particular the BET spends time together on:

° The development of and alignment with Bupa’s strategy

° Calibrating performance and generating improved opportunities

° Aligning on priorities (including business development and M&A)

° High-level resource and capital allocation

° Organisation culture and talent management

° Key global strategic initiatives such as driving innovation and leadership development.

Paul Newton General Counsel

Paul joined Bupa as a legal adviser in 1987. He became Bupa’s General Counsel in 2005 and joined the Executive Team in 2013. Paul leads the legal functions globally for Bupa. Paul is a qualified solicitor. He will be retiring at the end of 2016 and will be succeeded as Chief Legal Officer by Penny Dudley, with effect from 1 April 2016. Paul will remain as General Counsel and as a member of the BET until his retirement.

Penny Dudley Chief Legal Officer

Penny will take up the position of Chief Legal Officer in April 2016, having joined Bupa in 2010. Penny has extensive international legal experience in regulated financial services, originally qualifying as a solicitor in Australia, and subsequently relocating to the UK where she has held in-house legal roles at Invesco, and Macquarie.

Page 39: Longer, healthier, happier lives

37Bupa Annual Report 2015

Governance Report

Iñaki Ereño Managing Director, Spain and Latin America Domestic (SLA)

Iñaki joined Sanitas in 2005 and has been Managing Director for SLA since October 2012. Iñaki formerly held senior positions at Acerinox, the Telefónica Group and Carrefour as well as founding an online start-up. He has a Degree in Law and an MBA from IESE.

Dean Holden Managing Director, Australia and New Zealand

Dean has been at Bupa for over 25 years, during which time he has overseen operations in Australia, Spain, Hong Kong, Saudi Arabia, Latin America and Thailand. He has also led Bupa’s development into new markets including China and India.Dean is a Chartered Certified Accountant.

Richard Bowden Managing Director, United Kingdom

Richard has 30 years’ experience in the health sector, having previously served as Managing Director for Bupa Australia for 15 years, under the ownership of Bupa for 10 years and 5 years with AXA Asia Pacific. Richard was also Chairman and President of Private Healthcare Australia.

Alex Cole Chief Corporate Affairs Officer

Alex joined Bupa in July 2014. She has over 20 years’ experience across communications and public affairs and was Corporate Affairs Director at J Sainsbury plc and Cadbury plc.

Paul Zollinger-Read Chief Medical Officer

Paul became Chief Medical Officer of Bupa in July 2012. Paul has led a distinguished medical career within the UK’s National Health Service, both as a GP and latterly as CEO of a number of Primary Care Trusts. Paul has previously been the Medical and Primary Care Advisor at the King’s Fund.

Elisa Nardi Chief People Officer

Elisa joined Bupa on 1 February 2015 and took over the role from Joy Linton, our Interim Chief People Officer, on 1 May 2015. Elisa’s broad international business experience includes being Chief People & Services Officer at Virgin Media and HR executive at Lloyds Bank and Marconi. She ran a consulting business for seven years.

Garry Fingland Chief Information Officer

Garry joined Bupa in September 2014. Garry has extensive experience in IT transformation on a global basis having held a number of senior IT leadership roles at both Serco and Diageo. He is a Chartered Accountant and holds an MBA from Strathclyde Business School.

Page 40: Longer, healthier, happier lives

38Bupa Annual Report 2015

Governance Report

Bupa’s Governance FrameworkBupa’s Board normally meets 11 times a year and on other occasions as required. It devotes its time to overseeing Bupa’s strategy, the approval of business plans and significant capital expenditure, acquisitions and disposals, as well as monitoring business performance. Minutes of all Board and Committee meetings are recorded and reflect the substance of the discussion as well as the decisions made.

Bupa has a schedule of matters reserved for the Board’s approval, which was updated in 2015, and all other items are delegated to the CEO. The matters reserved for the Board can be found on bupa.com. The levels of authority delegated to management are regularly reviewed and updated when appropriate. The roles of the Board, the Chairman, the CEO, the Senior Independent Director (SID) and the Non-Executive Directors (NEDs) are clearly defined and set out in detail on bupa.com. The roles of the Chairman and the CEO are clearly separated.

Bupa’s governance structure is designed to enable the Board to lead Bupa within a framework of prudent and effective controls which enables risk to be assessed and managed. All Board and Committee members are provided with sufficient resources to undertake their duties, including access to both internal and external specialist advice at Bupa’s expense. The directors individually and collectively act in accordance with their duties under the Companies Act 2006. Bupa has a directors’ and officers’ insurance policy in place as well as a deed of indemnification.

The role of the BoardThe Board is responsible for the oversight of the management of Bupa, including:

° Agreeing Bupa’s long-term direction and objectives;

° Determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives;

° Oversight of Bupa’s operations;

° Setting Bupa’s values and standards;

° Appointment and retention of the Executive Directors, and ensuring that succession plans are in place;

° Ensuring that the appropriate and necessary financial and people resources are in place to meet Bupa’s objectives;

° Providing constructive challenge to the Executive Directors and senior management; and

° Responsibility for ensuring that the highest standards of both corporate and clinical governance are followed.

The role of the ChairmanThe Chairman is responsible for the leadership of the Board and is pivotal in the creation of the conditions necessary for overall Board and individual director effectiveness, both in and outside the boardroom, including:

° Embedding constructive relations between Non-Executive and Executive Directors;

° Ensuring clear, accurate and timely information is provided to the Board;

° Facilitating contributions from NEDs;

° Effective Board Governance;

° Succession planning and recruitment of NEDs;

° Setting agendas;

° Ensuring adequate time in meetings to discuss agenda items, in particular strategic items;

° Management of the CEO;

° Oversight of major subsidiary chairmen;

° Acting on board performance evaluation results;

° Ensuring effective communication with Association Members (AMs); and

° Chairing General Meetings.

The role of the CEOThe CEO is responsible for the day-to-day leadership and management of the business, in line with the strategy, risk appetite and long-term and annual objectives approved by the Board. The CEO may make decisions in all matters affecting the operations, performance and strategy of Bupa’s businesses, with the exception of those matters reserved for the Board or specifically delegated by the Board to its Committees, executive committees or subsidiary company boards.

The CEO leads the BET in driving the performance of the business and setting the overall strategic agenda. The BET is comprised of the CEO, who chairs the meetings, the CFO, the Managing Directors of the five Market Units and all Global Functional Directors. For more information about members of the BET, please see pages 36-37.

Leadership

Governance continued

Page 41: Longer, healthier, happier lives

39Bupa Annual Report 2015

Governance Report

The role of the Senior Independent DirectorThe role of the SID includes the following key elements:

° Acting as a sounding board for the Chairman and CEO on Board and AM matters;

° Leading the NEDs in the annual review of the Chairman’s performance;

° Being the focal point for Board members for any concerns regarding the Chairman, or the relationship between the Chairman and the CEO;

° Acting as a trusted intermediary for NEDs; and

° Being available to AMs.

The role of the Non-Executive DirectorsThe role of the NEDs has the following key elements:

° Constructively challenging and helping to develop proposals on longer-term direction and strategy;

° Scrutinising the performance of management in meeting agreed goals and objectives, and monitoring the reporting of performance;

° Satisfying themselves on the integrity of financial information, and that financial controls and systems of risk management are robust and defensible; and

° Having a prime role in appointing and, where necessary removing, Executive Directors, in executive succession planning, and determining appropriate levels of remuneration for those roles.

A copy of the standard NED Terms of Appointment, which set out their expected time commitment, is available on bupa.com, at Bupa’s registered office and is available for inspection before and during the AGM.

Board composition, tenure and diversityBupa’s Board consists primarily of Independent NEDs, who substantially outnumber the Executive Directors. The independence of NEDs from management and any other business or relationship which could materially interfere with their independence, is considered and confirmed on an annual basis. All directors offer themselves for annual re-election by the AMs, save for those retiring at the AGM.

The ChairmanLord Leitch, Bupa’s Chairman, who was independent on appointment, holds a small number of other appointments, none of which are considered to impede his role at Bupa. Details of his other appointments are set out in his biography on page 34.

Conflicts of interestAn annual review of all directors’ actual or potential conflicts of interest is undertaken. Any conflicts must be authorised and a director would abstain from discussions on any matter where they may be conflicted. Many of Bupa’s NEDs hold appointments at other organisations, as does the CEO and CFO, as set out in their profiles on pages 34 and 35. Each NED annually confirms that they are able to devote sufficient time to perform their role effectively. Stuart Fletcher, Evelyn Bourke,

Clare Thompson, Martin Houston, Roger Davis (2014:4)

Lawrence Churchill, Prof Sir John Tooke, Rita Clifton (2014:3)

Lord Leitch (2014:2)

1-3

4-6

7+

Length of tenure (years)*

5

3

1

% of Executive Directors % of Non-Executive Directors % of male Directors % of female Directors

The Executive Directors are the CEO and CFO

The Non-Executive Directors include the Chairman and SID

Board composition*

22%78%67%33%

Financial Services (2014:5)Clinical and Healthcare Systems (2014:1)Strategy and Development (2014:4)Brand and Marketing (2014:2)International Business (2014:3)

Sector experience*

5

1

2

3

4

* Data is at 31 December 2015

Page 42: Longer, healthier, happier lives

40Bupa Annual Report 2015

Governance Report

Succession plansFollowing the continual review by the Board of succession plans for NEDs, a phased replacement of NEDs coming to the end of their tenure has been agreed. This approach ensures continuity in the Board, as well as maintaining an appropriate balance of skills and experience on the Board and its committees. This is continually assessed and updated to meet the needs of the business.

Board diversity policyBupa’s policy of ensuring that there is broad experience and diversity on the Board was adopted by the Board in 2012. Diversity in Bupa embraces knowledge and understanding of relevant diverse geographies, peoples and their backgrounds, including race, disability, gender, sexual orientation, religion, belief and age, as well as culture, personality and work-style. In particular, Bupa’s Board is focused upon increasing Board diversity without compromising on the calibre of directors. Appointments to the Board are based on merit as well as complementing and expanding the skills, knowledge and experience of the Board as a whole. Within this context the Board aspires to have an appropriate proportion of directors who have direct experience of some of Bupa’s key markets. Our Board diversity policy can also be found on bupa.com.

Board training and developmentBoard and Committee members receive specific training and development on topics which are of relevance during the year. This can take the form of Bupa-led presentations on specific markets from leading academics and economists to more detailed training on forthcoming regulatory developments. During 2015 this included, for example, the implementation of Solvency II regulations and a session on the future of medical research and technology. NEDs also undertake training independently to ensure that they maintain their skills and knowledge required for the role. Topics covered were Financial Crime, Cyber Risk, Competition Law and Health & Safety.

Non-Executive Director Inductions 2015Following any appointment to the Board, a personalised induction programme is drawn up, which includes Bupa-led knowledge building, site visits to Bupa’s businesses in both the UK and overseas and discussion on strategy and development plans for the business.

As new members of the Board appointed during 2015, Clare Thompson and Roger Davis both commenced extensive induction programmes during the year, including meetings with the heads of various businesses within Bupa. Site visits were arranged to care homes and call centres in the UK in the first instance, in order to enable the new directors to experience first-hand the way Bupa cares for its customers. Visits to the Sanitas office in Madrid took place during the year, with Clare specifically focusing on risk and audit issues.

Roger commented that he was impressed with the “passion, forward thinking attitude and professional competence” of the Sanitas team in Madrid and commented that he “had gained some great insights into the Sanitas business, both in respect of their current activities and future plans.”

Clare visited two UK care homes, both with very different facilities. She commented that she was, “struck by the consistent quality of Bupa employees who were passionate about providing high quality care to residents in their charge.”

Clare and Roger also attended one of the Association Member briefing sessions in October 2015 at which attendees are encouraged to ask the CEO, CFO and Chairman any questions in relation to strategy and performance. In addition to gaining further knowledge about Bupa, the briefing session presented an opportunity for Clare and Roger to engage with other AMs to learn more about issues of interest to them at an early stage in their directorships.

Leadership

Governance continued

Page 43: Longer, healthier, happier lives

41Bupa Annual Report 2015

Governance Report

In 2014 and 2015 we undertook internally facilitated board effectiveness reviews, using the online facility developed by Independent Audit Limited. The 2015 review concluded that Bupa’s Board continued to operate effectively in an open and transparent manner, providing support and challenge to executive management.

A number of key positive themes were identified as follows:

° High quality Non-Executive Directors had been recruited to the Board;

° Bupa’s Talent Management had been significantly enhanced; and

° Great progress had been made on engagement of, communication with and breadth of experience among Association Members.

Board performance and evaluationThe last externally facilitated performance evaluation was conducted by Dr Tracy Long, CBE, of Boardroom Review in 2013.

Boardroom Review has no connection with Bupa, other than having facilitated the external reviews in 2010 and 2013.

The next triennial externally evaluated review will take place in 2016.

The results from the 2015 action plan and achievements against the goals set are outlined in the table below.

Priorities arising from the 2015 evaluation are set out at the bottom of the page and once again the Nomination & Governance Committee will monitor performance against these priorities during the year. We will report on progress in the 2016 Annual Report.

Board performance evaluation action plan 2015 (from the 2014 Board evaluation)

Categories Board action plan for 2015 Achievements against action plan during 2015

Strategic focus Introduce more freeform discussions, taking advantage of the extensive experience within the Board

An outline of the annual strategy session was agreed in advance and more discursive time on strategy and the future environment was facilitated. A three-year plan was created to assess company performance against.

Risk management Focus on upskilling and reshaping the organisation Focus was on strengthening the Risk team, risk and control frameworks, disposing of businesses and fully embedding Solvency II ahead of implementation in 2016.

Customers, competition and external developments

Focus increased attention on customers, competitors and factors affecting markets

The Board considered a paper on global competition and market specific competitive challenges were discussed during each Market Unit update. The role of the Net Promoter System (NPS) in informing a better understanding of customers’ needs was discussed.

Clarity of purpose Further demonstrate how Bupa is addressing and fulfilling its purpose

At the June annual strategy session, the Board considered a paper on how Bupa’s operation as a commercial, purposeful business best served delivery of its purpose.

2016 goals arising from the 2015 Board evaluation

Categories Board action plan for 2016

Strategic Focus Continue to balance the number of strategic and operational agenda items. Explore risk appetite in relation to long-term strategy. Board submissions to be amended slightly to balance the amount of operational and strategic issues discussed

Customers, competition and external developments

Further discuss the activities of Bupa’s competitors and external perspectives on Bupa’s markets. Monitor and oversee further implementation of NPS across Bupa

Board impact Set aside time to ensure there is real clarity about the expectations of the value that the Board can bring to Bupa, once the four new NEDs have been in the role for six months

Effectiveness

Page 44: Longer, healthier, happier lives

42Bupa Annual Report 2015

Governance Report

Attendance at Board meetings during 2015 The Board held 11 scheduled meetings during the year (both in the UK and overseas) and the Board attended an annual two-day strategy offsite session in June 2015. The tables below show the attendance levels and key strategic items discussed at Board meetings during the year.

February March April May June July August September October November December

Lord Leitch

Stuart Fletcher

Evelyn Bourke

George Mitchell1 – – – – – – –

Lawrence Churchill

Rita Clifton2 A

Roger Davis3 – – – – – A

Martin Houston

John Lorimer4 – – – – – –

Clare Thompson5 – – – A

Professor Sir John Tooke6 A

1 George Mitchell stepped down from the Board on 14 May 2015.2 Rita Clifton was unavailable to attend the June Board due to a conflicting board meeting.3 Roger Davis joined the Board on 16 July 2015. He was unavailable to attend the August Board due to a conflicting commitment.4 John Lorimer stepped down from the Board on 30 June 2015.5 Clare Thompson joined the Board on 1 May 2015. She was unavailable to attend the October Board due to a conflicting board meeting.6 Professor Sir John Tooke was unavailable to attend the August Board due to a conflicting commitment.A Apologies

Examples of key strategic items covered included:

February 2014 Outturn & Impact on 2015-17 Plan/Measuring Value Creation/Global Competition Paper

July Follow-up from June Board Strategy Off-Site/Project Updates

March(meeting held in Barcelona)

IT Update/Approval of 2014 Annual Report & Accounts/Solvency II Update

August Half Year Results

April Market Opportunities/Net Promoter System Update September Bupa ANZ Business Update/Cyber Risk/Approval of Bupa’s 2015 ORSA

May Key Strategic Partnership Updates/Strategic Review/Review of a number of M&A opportunities

October Financial Performance Calibration/Key Strategic Partnership Update/UK Market Unit Business Update/Global Brand/Talent to Deliver Bupa 2020

June(meeting held in West Sussex)

Bupa UK Strategy & Performance Update/Clinical Quality Update/Board Strategy Off-Site

November 2016-2018 Plan Overview/Bupa Global Market Unit Business Update/Health & Safety & Employee Health & Wellbeing Update/Clinical Risk Governance Proposal

December Internal Board Evaluation

Effectiveness

Governance continued

Page 45: Longer, healthier, happier lives

43Bupa Annual Report 2015

Governance Report

Calendar of events 2016

March Financial Results Briefing Call

Briefing call with the CEO and CFO following the announcement of financial results allows the AMs to understand and challenge financial and operational performance.

May Annual General Meeting The AGM is preceded by a seminar update in respect of one of Bupa’s business areas. In 2015, the Seminar was led by Bupa UK and focused on Strategy, Performance, Customers, Quality and Our People. 50% of AMs attended the 2015 AGM (2014: 54%). The number of attendees increased in 2015 but comprised a smaller percentage of the total number of AMs. This was due to the increase in the number of AMs following the extensive 2015 appointment exercise.

At the AGM, Bupa proposes a resolution on each substantially separate issue, including a resolution on the Annual Report and Accounts and the Remuneration Report and Policy. Voting at the AGM is conducted on a show of hands. The questions raised by AMs at the 2015 meeting covered a broad range of areas such as Cyber Security, Customer Satisfaction Measurement, Directors’ Remuneration, Internationalising the Association Membership, Strategic Partnerships and Solvency II.

July New AMs Induction Session This is an opportunity for newly appointed AMs to gain a further understanding of Bupa, our strategy, their role in our governance and how they can assist Bupa to achieve its purpose.

59% of the newly appointed AMs attended the induction session in 2015.

August Half Year Results call As for the Financial Results Briefing Call (above).

October AMs Briefing Sessions This is another opportunity for engagement with representatives of the Board on matters of strategy and performance. These sessions encourage rigorous challenge and questioning by the AMs.

Four briefing sessions were held with a total of 46 AMs in attendance during 2015. A short presentation on Bupa’s performance and development was followed by an in-depth Q&A at each session.

BondholdersBupa also has a number of debt securities in issue by subsidiary companies and is therefore required to operate in accordance with the UK Listing Rules, Disclosure Rules and Transparency Rules in respect of its announcements of financial results and operations. Bupa’s bondholders and other interested parties are formally made aware of the Half Year and Full Year results via briefing calls, and have the opportunity to question management on the financial performance and strategy of Bupa.

Other stakeholdersAcross our markets, we engage regularly with policymakers and regulators, health and care professionals, consumer groups, NGOs and other key stakeholders. This engagement enables us to contribute to the health policy debate and to build an understanding of issues relevant to our customers and to healthcare generally.

We also partner with a number of other commercial organisations and NGOs, to address and positively impact on specific health issues as part of our commitment to help more people access better healthcare.

Engagement

Association membersBupa maintains a register of around 100 Association Members (AMs) (116 as at 31 December 2015) who perform a key governance role ordinarily undertaken by shareholders. AMs generally serve for a period of ten years. AMs have no equity interest and, consequently, no right to dividends.

AMs are eminent individuals in their own field, coming from a diverse range of sectors, including health and social care, business, regulatory, academia, as well as charities and the public sector. Their expertise enables them to provide challenge to the Board on matters of performance and strategy, and furthermore, to draw upon their skills, knowledge and experience to help inform future strategy and development. Fundamentally, their role is to hold the Board to account in delivering on our purpose of longer, healthier, happier lives.

A number of steps were taken during 2015 to appoint new AMs with greater experience of the key overseas markets in which Bupa operates. A professional search firm was retained to help identify potential candidates with experience of geographies where Bupa operates.

Bupa’s AMs have a number of opportunities to engage with the entire Board, including at the AGM which is traditionally well attended. A summary of the questions asked at many of the events is circulated to all AMs, the Board and the Bupa Executive Team which ensures that the views of AMs are well communicated and understood within the business.

These more formal sessions are combined with regular correspondence on key changes and developments within Bupa, such as major acquisitions. The CEO, Chairman, SID and Company Secretary are available to the AMs throughout the year. To ensure that the AMs are kept fully informed, they also have access to a secure website containing useful information and updates, as well as daily media briefings and a calendar of forthcoming events.

Page 46: Longer, healthier, happier lives

44Bupa Annual Report 2015

Governance Report

Attendance

Feb 2 Mar 31 Mar Jun Jul Aug Sep Oct Dec

Clare Thompson1 – – –

John Lorimer2 – – – – –

Lawrence Churchill A

Roger Davis3 – – – – – – –

Martin Houston A A

George Mitchell4 – – – – – –

1 Clare Thompson joined the Committee on 1 May 2015 and was appointed as Chair on 1 July 2015.2 John Lorimer stepped down from the Committee as Chair on 30 June 2015.3 Roger Davis joined the Committee on 17 September 2015.4 George Mitchell stepped down from the Committee on 14 May 2015.A Apologies

Key Items covered included:

February Key Accounting Issues and Areas of Judgement/Financial Highlights/Audit Committee Effectiveness/Insurance Business Reserving

2 March Annual Report/Review of Systems of Internal Control and Risk Management/KPMG Audit Highlights

31 March SII Phase 1 Balance Sheet Review

June Key Accounting Issues and Areas of Judgement/Internal Audit Plan H2 2015 Solvency II Pillar 3 reporting/KPMG Audit Plan/Engagement Letters and Audit Fees

July Key Accounting Issues for Half Year Report

August Half Year Report Approval/Internal Control and Risk Management Assessment Half Year 2015

September Longer-Term Viability Statement/Solvency II Basis Of Preparation/KPMG Assurance on December 2014 SII Balance Sheet/Review of EU Audit Reform/Report of Non-Audit Fees

October Internal Audit 2016 Plan Outlook/Changes to ICRMA Process/Speak Up Update/Assurance Update for Solvency II/Quantitative Reporting Template

December 2016 Global Internal Audit Plan/Accounting & Reporting Issues for Year End/Review and Discussion of Draft Longer-Term Viability Statement/EU Audit Reform/Insurance Business Reserving Update/Solvency II Update/KPMG Update/Review of Committee Terms of Reference

Audit Committee Report

Governance continued

The remit of the Audit Committee includes monitoring the integrity of Bupa’s financial statements, the effectiveness of internal control systems and reviewing the effectiveness, performance and objectivity of the internal and external auditors.

All members of the Committee are Non-Executive Directors (NEDs) and this applied throughout the year. George Mitchell and John Lorimer stepped down from the Committee on 14 May 2015 and 30 June 2015 respectively after their retirement from the Board. Clare Thompson joined the Committee as a member on 1 May 2015 and as Chairman on 1 July 2015. Roger Davis joined the Committee on 17 September 2015.

The biographies of members can be found on pages 34 and 35

The CEO, CFO, Corporate Controller, Chief Internal Auditor, Chief Risk Officer and external auditors are routinely invited to attend meetings. The Committee regularly holds separate discussions with the external auditor, the Chief Internal Auditor

and Chief Commercial Actuary without management present. In compliance with the Code, at least one of the members of the Committee has recent and relevant financial experience.

A copy of the Committee’s Terms of Reference is available on bupa.com.

2015 activitiesIn discharging its responsibilities, the Committee met nine times during the year. The increase in the number of meetings was in part due to Solvency II preparation. In addition to ensuring the integrity of the financial results and monitoring the results of the Internal Audit reviews, the Committee was also active throughout the year in other key areas.

During 2015, the Committee:

° Reviewed the full year preliminary announcement, Annual Report and Half Year results announcement, including the going concern statements and the draft longer-term viability statement for the full year 2015;

° Reviewed Solvency II Pillar 3 reporting;

° Continued the review of the policy on the engagement of the external auditor to provide non-audit services and expanded the routine analysis of fees paid for non-audit services by other audit firms;

° Approved the audit plans for the external auditor;

2015 was a year of managing change for Bupa’s Audit

Committee, including preparation for the new Solvency II regime and

challenging our strategic plans in order to conclude on the

longer-term viability of Bupa.

Clare ThompsonCommittee Chair

Page 47: Longer, healthier, happier lives

45Bupa Annual Report 2015

Governance Report

° Considered reports from the external auditors reviewing any accounting or judgemental issues requiring its attention, as well as any other matters the external auditors wished to bring to the Committee’s attention;

° Approved the Internal Audit Charter, Plans, resourcing and budget and; considered reports from the Chief Internal Auditor on the results of internal audit reviews, significant findings, management action plans, and timeliness of resolution;

° Reviewed the Company’s Enterprise Policies and internal financial controls;

° Met with internal and external auditors and the Chief Commercial Actuary without the executives;

° Monitored and reviewed the effectiveness of the internal audit activities, and reviewed the independence and performance of the external auditors;

° Discussed the results of the Committee effectiveness review; and

° Reported to the Board on how it had discharged its responsibilities.

Financial reportingThe Committee reviewed the appropriateness of the Half Year and Annual financial statements, which it carried out with both management and the external auditors and included:

° Whether the Annual Report represented a fair, balanced and understandable view of the information;

° The clarity and sufficiency of disclosures and compliance with financial reporting; and

° The material areas in which significant judgements have been applied.

In carrying out the review, the Committee regularly considered papers from the Corporate Controller and the external auditors highlighting any significant areas of risk or judgement that have arisen in the period.

The significant areas of judgement raised in these reports for 2015 and how they were addressed is detailed below:

° Goodwill valuations: In relation to goodwill impairment testing, the Committee reviewed and discussed management reports outlining the basis of the assumptions used for our most sensitive Cash Generating Units (CGUs)

and considered these in light of business performance, with particular focus on the ongoing funding pressures and the impending impact of the National Living Wage on the Care Services business in the UK, the current valuations of comparable companies and any other relevant external information available. Reporting from the external auditors was also considered. In November 2015, the Committee held a specific discussion and familiarisation/training session on goodwill impairment testing approaches to better equip themselves when coming to any conclusions. This session was led by the Corporate Controller, with the external auditors providing an independent view.

° Claims provisioning: The Committee received reports from management detailing claims reserving methodologies and reviewed and approved the approach to claims reserving. In particular, the Committee reviewed and approved the assessment of margins of prudence, with a focus into areas where there were changes in methodology or practice. In making these judgements, the Committee also considered reports from the external auditor.

° Property valuations: The Committee considered the results from the external valuations and discussed these with management in light of current trading performance of the businesses in which the properties are used and the external environment. The Committee considered directors’ valuations in periods where no external valuation had been carried out and received information from management about any potential write downs identified as in the case of Care Services UK. The Committee also reviewed reporting from the external auditors addressing the valuations.

° Pension assets and liabilities: The principal defined benefit scheme in the UK is The Bupa Pension Scheme. 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. The Committee reviewed internal management reports to determine their conclusions; supported by detailed triennial valuations with annual interim reviews produced by the independent scheme actuary.

External auditorsIn relation to Bupa’s external auditors, KPMG, the Committee assesses the scope, fee, objectivity and effectiveness of the audit process annually. In assessing the effectiveness of the audit process, prior to making any recommendation on the appointment or reappointment of the external auditors, the Committee reviewed the effectiveness of their performance against criteria which it agrees, in liaison with executive management, at the outset of each year’s audit. In so doing, the Committee assesses KPMG’s effectiveness during Committee meetings and also considers feedback on the prior year’s external audit obtained through a satisfaction survey. The Committee considers a number of areas such as the overall quality of service, timeliness of the resolution of issues, the quality of the audit resource and whether the audit plan was followed. The Committee is satisfied that KPMG continues to provide an effective audit service.

KPMG has been Bupa’s auditor since 1985. The latest rotation of audit partner was made after the conclusion of the 2013 audit. After consideration of cost, effectiveness and KPMG’s independence, and taking account of the rotation of the lead audit partner, the Committee was satisfied that KPMG continued to be independent and agreed that it would likely be disruptive to place the audit out to tender during 2015, at a time when Bupa was preparing for the implementation of Solvency II from 1 January 2016.

The Committee monitors the developments in the new EU Audit Regulation. Under the transitional arrangements, the Company will be required to rotate audit firm at the next appointment after 17 June 2020. In 2016, the Committee will review Bupa’s tendering options and decide when to place the external audit out to tender.

To ensure that KPMG’s objectivity and independence is safeguarded, the Committee has a formal policy on Bupa’s relationship with the external auditors, which includes financial approval limits for non-audit services and restrictions on the nature of work that can be performed. The Committee reviews non-audit services provided by KPMG and other audit firms to assess any potential conflicts of interest.

Page 48: Longer, healthier, happier lives

46Bupa Annual Report 2015

Governance Report

As part of the evaluation of the external auditors, the directors confirmed that they were satisfied that the external auditors had maintained their independence. In addition, KPMG also annually reports on whether and why it deems itself to be independent. Fees paid to KPMG for non-audit services are shown in Note 2.3 to the Accounts.

Internal control and risk management assuranceThe Board has overall responsibility for ensuring Bupa’s system of internal control and risk management is maintained and for reviewing its effectiveness. Such a system is designed to manage or mitigate, rather than eliminate the risk of failure to achieve business objectives, and can only provide reasonable, and not absolute, assurance against material misstatement or loss. There is an ongoing process for identifying, evaluating and managing principal risks faced by Bupa. This process was in place throughout the year under review and up to the date of approval of the Annual Report and Accounts, and accords with guidance on Risk Management, Internal Control and Related Financial and Business Reporting.

The Committee carried out reviews of the effectiveness of the systems of internal control and risk management in place at both the half and full year, which considered all material internal controls relevant to the preparation of the financial statements. The Internal Control and Risk Management Assessment is a first line of defence self assessment, subject to review and challenge by the second and third lines, and includes the results of the work of internal audit; the operation of material controls (financial, operational and regulatory compliance) and Enterprise Policy compliance.

During these reviews, the Committee identified a number of weaknesses, however, none of these were determined to be significant to the preparation of the financial statements. The Committee noted the steps that had already been, and were planned to be, taken by management, to address those areas identified, and the plans to further enhance the internal control systems and strengthen risk management.

During the year, the approach to the Internal Control and Risk Management Assessment was further enhanced. This sought to provide a more detailed assessment of the levels of compliance with Bupa’s relaunched Enterprise Policy Suite and was subject to rigorous review and challenge by management.

Internal auditInternal audit provides assurance over adequacy in the operation of internal controls, reviews their effectiveness by undertaking an agreed schedule of internal audits each year in accordance with the approved Global Internal Audit Plan and reports its findings to management and the Committee regularly. During 2014 an enhanced approach to internal audit, within a three lines of defence model, was adopted. The objective of this was to design and draw out thematic issues and areas for governance, risk and control development. Additional internal audit resourcing was reviewed and approved to facilitate the revised approach. The implementation of key developments including recruitment for key positions, system and methodology enhancements were made throughout 2015.

Bupa’s internal audit team acts in accordance with the Global Institute of Internal Auditors’ professional standards and the Chief Internal Auditor has a direct reporting line to the Chairman of the Committee. Where specific skills are not available in-house, the Chief Internal Auditor and Committee Chairman have the ability to procure the services of expert external advisers. The Committee annually reviews and recommends the Internal Audit Charter to the Board for approval and approves the Internal Audit budget.

Plans for 2016In 2016, the Committee plans to focus on:

° Assessing the implementation of the EU Audit Reform regulations and the approach to and timing of placing the external audit out to tender;

° The further development of the Internal Control and Risk Management Assessment system to ensure its continued effectiveness; and

° Developing the assurance process in respect of IT systems development and digital media.

Audit Committee Report

Governance continued

Page 49: Longer, healthier, happier lives

47Bupa Annual Report 2015

Governance Report

The principal role of the Committee is to assist the Board in its leadership and oversight of risk across Bupa.

This includes:

° Understanding and, where appropriate, optimisation of current and future risk exposures;

° Reviewing and recommending overall risk appetite and tolerance to the Board;

° Reviewing the consistency of corporate strategy and risk appetite;

° Reviewing the risk management framework including Enterprise Policies, process and controls;

° Receiving and considering reports on all categories of risk; and

° Promoting a risk awareness culture throughout Bupa.

In making this report, the Committee does not wish to duplicate the detailed description of Bupa’s Risks and Uncertainties which are set out on pages 26-29 and forming part of the Strategic Report.

Committee governanceA copy of the Committee’s Terms of Reference is available on bupa.com.

The Chief Risk Officer continues to have unrestricted access to all members of the Committee.

Clare Thompson and Roger Davis joined the Committee on 1 May 2015 and 17 September 2015 respectively. Sir John Tooke was appointed to the Committee on 1 January 2016 to further strengthen the clinical membership. George Mitchell and John Lorimer stepped down on 14 May 2015 and 30 June 2015 respectively. Members of the Committee are all Non-Executive Directors; the CEO, CFO, Chief Risk Officer, Chief Medical Officer and Chief Internal Auditor are routinely invited to attend meetings. Representatives from the external auditors, KPMG, are also invited to attend meetings. The biographies of members can be found on pages 34 and 35.

Attendance

Mar Apr May July Sep Oct Nov

Lawrence Churchill

Roger Davis1 – – – – –

Martin Houston A

John Lorimer2 A – – – –

George Mitchell3 A – – – –

Clare Thompson4 – – A

1 Roger Davis joined the Committee on 17 September 2015. 2 John Lorimer stepped down from the Committee on 30 June 2015.3 George Mitchell stepped down from the Committee on 14 May 2015.4 Clare Thompson joined the Committee on 1 May 2015. A Apologies

Key items covered included:

March Approach to Country Concentration Risk

April Solvency II Planning Report/Financial Crime Risk and Controls Assessment/ Risk Appetite Review/Risk Scenarios: Group Stress & Scenario Testing 2014/15 and Discussion of Risk Scenarios 2015/16

May Approval of USP Application/Geographical Risk Assessment

July Information Governance Risk/2015 Group ORSA Draft Report/Risk Appetite Framework/Country Risk Assessment Proposal/Risk Maturity Framework

September Group ORSA 2015/Developments to Bupa’s Risk Framework and Capability/Terms of Reference Review

October Cyber Risk Project Implementation Update/Insurance Programme

November Emerging Risks/Stress and Scenario Testing/System of Governance Review/ 2016 Risk Outcomes and Plan

Risk Committee Report

During the year the Committee strengthened Bupa’s Risk

Management, embedding a robust risk framework

throughout the business and monitoring our response to Solvency II requirements.

Lawrence ChurchillCommittee Chairman

Page 50: Longer, healthier, happier lives

48Bupa Annual Report 2015

Governance Report

Assessment, which is a report from the CEO, supported by both the Risk and Audit functions. In the most recent review, the Committee noted significant improvement in Spain, high standards of performance in Australia and continued evolution required in the UK and developing markets.

Risk appetite ° The Chief Risk Officer led a significant

review of how Bupa expresses Risk Appetite (as reported on page 109). At this stage we have well quantified assessments of Financial Strength, Financial Stability and Conduct Risks. We are continuing to improve our measurement of risk in all areas.

Strengthening linkages with subsidiary risk committees ° Progress was made in strengthening

linkages with major subsidiaries. Bupa’s suite of 29 Enterprise Policies was adopted by the Boards of our major subsidiaries and deployment throughout the business commenced. The Chairman attended the Risk Committee of Sanitas during the year and held meetings with the newly appointed Chair of Sanitas’ Board Risk Committee and the CRO for Spain and Latin America domestic business. Bupa’s first ever global Risk Summit was held with attendance of Board Risk Committee Chairs, the CRO and Risk Directors from around the world and guests from the Internal Audit function and from KPMG.

During 2015, the Committee also considered the following:

Policies review and approval ° In line with the Matters Reserved for the

Board, the Committee considered and approved a number of policies such as the Insurance Risk and Solvency II Data Quality Policies which were implemented as a result of the Solvency II planning process.

Stress and scenario testing ° The Committee reviewed the results of

the stress and scenario testing which would form part of the 2015 and 2016 ORSAs. The scenarios considered a number of macro and microeconomic impacts on the business such as an economic slowdown in China, Greek exit from the EU and the impact on the Eurozone such as a weakening Euro, a strengthening of the US economy and the US Dollar and rising interest rates.

2015 activitiesAs set out in last year’s report, the Committee’s focus for 2015 was the programme of thematic risk reviews, overseeing the implementation of Solvency II within Bupa, implementation of the three lines of defence, development of the articulation and measurement of risk appetite and strengthening linkages with major subsidiary risk committees.

Thematic reviews ° The programme of thematic reviews

included consideration of Organisational Capacity and Capability, Clinical Governance and Information Security. These themes will continue into 2016. Major improvements were made in consistency of standards and reporting of Clinical Governance and a multi-million pound programme has been initiated to strengthen Information Security.

Solvency II ° Solvency II was a major focus and

force for good in strengthening Risk Management. The Risk Management Framework and System of Governance has been improved and the Senior Insurance Management Regime implemented. A great deal of time was devoted to determining the Undertaking Specific Parameter for insurance premium risk (replacing the Standard Formula parameter with Bupa’s own) which was approved by the Prudential Regulation Authority and reduces Bupa’s Solvency Capital Requirement commensurate with its risk. The production of the ORSA has provided the organisation with a comprehensive analysis of current and future risk exposures across Bupa.

Three lines of defence ° The Committee encouraged

management to continue to strengthen the first line of defence, where the Bupa Enterprise Risk Committee plays a leading role as the first line committee. In conjunction with the Audit Committee, the Committee monitors progress through scrutiny of crystallised risks and by reviewing the Internal Controls and Risk Management

Risk Committee effectiveness review ° Overall, the Committee considered that

it was effective during 2015 and noted actions that were being undertaken to address areas for development such as more fully embedding the risk management framework throughout the business, articulation of risk appetite, as well as improvements in risk governance.

New market entry risk assessments ° Throughout the year, the Committee

considered the risks associated with Bupa’s expansion plans and those associated with each proposed major acquisition. These reviews included the consideration of whether new market opportunities were within risk appetite and the impact on Bupa’s solvency position arising from growth through acquisition.

Risk and remuneration oversight ° During the year, the Risk Committee

Chairman provided a formal report as part of the Remuneration Committee’s assessment of the Company’s performance throughout the calendar year.

Plans for 2016In 2016, the Committee plans to:

° Oversee the embedding of Solvency II procedures and requirements as part of everyday activity;

° Monitor enhancements to risk policies and culture embedding in the first line;

° Monitor a strengthening of our Information Security systems;

° Dynamically monitor changing patterns of risk exposure; and

° Integrate the oversight of Clinical Governance previously carried out by the Medical Advisory Panel.

Risk Committee Report

Governance continued

Page 51: Longer, healthier, happier lives

49Bupa Annual Report 2015

Governance Report

2015 activitiesDuring 2015, the Committee considered the following:

Board succession The Committee undertook significant work on Board recruitment during 2015. The Zygos Partnership and Ridgeway Partners LLP were retained to recruit a successor to John Lorimer as Audit Committee Chairman and new NEDs with international experience respectively. Both recruitment firms have also provided other search and recruitment services to Bupa.

The Committee considered shortlists of candidates and the specifications for each role. This was followed by a formal and rigorous interview process of shortlisted candidates, against set objective criteria. As a result of this work, four new NEDs were appointed in a 12-month period. Clare Thompson and Roger Davis were appointed to the Board during 2015 with Simon Blair and Janet Voûte appointed on 12 January 2016.

Committee effectivenessThe Committee discussed the results of the internally facilitated effectiveness review. Overall, the Committee considered that it was effective during 2015 and noted areas for development.

The Committee leads the process for Board appointments and makes recommendations together with reviewing the balance of skills, experience, knowledge, structure and composition of the Board and its Committees.

The Committee keeps Bupa’s governance structures under review and makes appropriate recommendations to ensure that Bupa’s arrangements are, where appropriate, consistent with best practice governance standards. The Committee also identifies and selects suitable AM candidates.

A copy of the Committee’s Terms of Reference is available on bupa.com.

All members of the Committee are non-executive, apart from Stuart Fletcher as CEO. Members’ biographies can be found on pages 34 and 35. The Chief People Officer and CFO are invited to attend meetings where considered appropriate. George Mitchell stepped down from the Committee on 14 May 2015 following his retirement from the Board.

Lawrence Churchill was appointed as Senior Independent Director on 14 May 2015.

Association member recruitment The process for the identification and selection of new AMs was also a key activity for the Committee during 2015, with 24 new AMs appointed during the year. This exercise, which has now been concluded, formed a major part of the programme of the AM refreshment. Odgers Berndtson was retained to assist with the process of identifying potential AMs with international experience in one or more of Bupa’s key markets.

The Committee also monitored Bupa’s compliance with the UK Corporate Governance Code and continued to develop the governance arrangements of Bupa’s major subsidiary companies.

Plan for 2016In 2016, the Committee plans to focus on Board succession planning, including identifying the key skills, knowledge and experience that the Board requires for the future and the recruitment of new NEDs to replace current NEDs coming to the end of their tenure.

Attendance

Jan 12 Feb 24 Feb Apr Sep Oct Dec

Lord Leitch

Lawrence Churchill

Rita Clifton

Stuart Fletcher

George Mitchell1 – – –

1 George Mitchell stepped down from the Committee on 14 May 2015.

Key items covered included:

January Recruitment of new Audit Committee Chairman

February 12 NED Recruitment Update/Board Succession and Board & Committee Membership/Association Members’ Update

February 24 Bupa’s Annual Report & Accounts 2014: Corporate Governance Report/Subsidiary NED Fees

April Association Member Recruitment Update/NED Recruitment Update

September NED Recruitment Update/Association Members Update/High Level Review of Governance Arrangements for Bupa’s Provision Subsidiaries/Board & Committee Evaluation Process for Coming Year/Review of Committee’s Terms of Reference

October NED Recruitment Update

December NED Update/Association Members Update/UK Corporate Governance Code Compliance/Committee Evaluation

Nomination & Governance

Committee Report

In 2015, the Committee recruited four new Non-Executive Directors and

significantly enhanced the international experience of the

Association Membership.

Lord LeitchChairman

Page 52: Longer, healthier, happier lives

50Bupa Annual Report 2015

Governance Report

2015 activitiesIn 2015, the Panel continued to develop Bupa’s Clinical Governance and Quality Strategy which was approved in 2013. This strategy underpinned Bupa’s journey to excellence in the delivery of care either through direct provision by Bupa or through Bupa’s network of approved hospitals.

In discharging its responsibilities during 2015, the Panel oversaw the following:

° Critical Clinical Incident Review: The Panel reviewed research conducted on the definition and reporting of Critical Clinical Incidents in relation to Bupa’s core list and discussed whether the terminology used was globally appropriate.

° Clinical Risk Framework: The Panel reviewed the Clinical Risk Framework (the CRF) which was designed to improve the way Bupa manages clinical risk in order to support the 2020 vision of making quality healthcare accessible and affordable. The Panel made various recommendations including on further improvement of information management and engagement of staff to improve clinical risk management. The CRF was agreed at the Bupa Enterprise Risk Committee and its implementation commenced in January 2016.

The principal role of the Medical Advisory Panel (the Panel) during 2015 was to advise the Board on clinical governance, professional standards, quality of care and the development of Bupa’s medical policy. The Panel provided oversight of Bupa’s clinical governance arrangements and reported to Bupa’s Risk Committee on matters relating to clinical risk and advised Bupa’s Risk Committee on risk appetite in this area.

This advice was underpinned by a framework that measured, monitored and improved the safety and quality of all clinical services, promoting optimal customer health outcomes and clinical excellence.

The Panel comprised two Bupa Non-Executive Directors, four independent members and the CEO. Anita Donley was appointed as an independent panel member on 1 March 2015. The independent members, highly respected individuals drawn from clinical practice, health and care management and academia, provide invaluable input into the clinical governance standards and strategy at Bupa. The Panel was supported by the Chief Medical Officer who attended all Panel meetings and the Chief Nurse. The Chief Risk Officer also attended Panel meetings.

° Annual Clinical Quality Report: The Panel reviewed the draft Annual Clinical Quality Report 2014, the purpose of which is to inspire and support Bupa’s employees and to drive continuous safety and quality improvement. The Panel agreed the Report for appropriateness ahead of internal publication.

° Approach to clinical risk and governance: As part of a wider review of Bupa’s clinical governance arrangements, the role and purpose of the Panel was reviewed by the Board and it was agreed that the aims and objectives of the Panel would be more effectively achieved through a different approach.

As a result:

° The clinical membership of the Risk Committee was strengthened by the appointment of Professor Sir John Tooke;

° The Executive Global Clinical Governance and Quality Steering Committee was enhanced by the appointment of two independent members; and

° A new Medical Advisory Council was established which will meet at least twice a year to advise on health horizon scanning and give advice to Bupa on key risks and opportunities relevant to delivering on Bupa’s purpose.

Medical Advisory Panel

Governance continued

The Panel sought to ensure that Bupa inspired and led a culture of innovation and excellence to achieve the very best in care for all our customers, patients

and residents.

Sir John TookePanel Chairman

Attendance

Mar Jun Sep Nov

Professor Sir John Tooke

Rita Clifton CBE A

Stuart Fletcher

Tessa Green CBE

Professor Gillian Leng CBE

Baroness Mary Watkins A

Anita Donley OBE1 A A

1 Anita Donley was appointed on 1 March 2015.A Apologies

Key items covered included:

March Conflicts of Interest/Bupa Chile – Clinical Governance Quality Audit/Global Quality Performance Report Q4/Clinical Governance Annual Review Report 2014/ Terms of Reference

June Conflicts of Interest/Bupa’s Clinical Risk Framework/Global Quality Performance and Risk Report Q1/Annual Clinical Quality Report 2014

September Bupa’s Clinical Risk Framework/Global Quality & Risk Quarterly Report/New Governance Structure

November Clinical Academic Partnership/Bupa’s Clinical Risk Framework/Global Quality Performance & Risk Report (Q3)/Enterprise Clinical Governance policy

Page 53: Longer, healthier, happier lives

51Bupa Annual Report 2015

Governance Report

Our principal role is to devise and govern remuneration systems and packages that drive sustainable, long-term performance, with a clear link to Bupa’s strategic goals and purpose.

Our remuneration policy was approved at the 2015 AGM and remains unchanged.

We are committed to being open and transparent with our Association Members and as usual, our Annual Report on Remuneration will also be tabled for an advisory vote at the 2016 AGM.

Performance and pay in 2015As summarised in the CEO’s statement from page 14, 2015 has been a steady but challenging year for Bupa. We focused on meeting the needs of customers across our diversified geographic footprint, maintained strong market positions, grew revenue and customer numbers whilst delivering solid profit performance.

The annual bonus for 2015 and the 2013-2015 LTIP payout reflect this performance. The 2015 bonus was based on stretching profit and revenue targets, and also reflected the achievement of personal and strategic objectives including the strengthening of talent and succession pipelines, focus on risk and governance and growing the impact and reputation of Bupa externally. The Committee approved bonuses of 92.6% and 71.4% of salary for the CEO and CFO respectively although these were lower, by some measure, than 2014 reflecting the headwinds Bupa faced this year. As highlighted in last year’s report, partial mandatory deferral of the annual bonus was introduced to strengthen the alignment of the remuneration framework and the long-term nature of our strategic goals. As a result, 50% of these bonuses were deferred for three years and are subject to malus provisions over this period. More details are provided on page 53.

The 2013-2015 LTIP was based on three-year growth in reserves and risk adjusted profit, and vested at 38.4% of target. In determining the vesting outcome, the Committee took into account the significant decline in the Australian dollar versus Sterling over the performance period and its impact on the achievability of the targets set at the start of the cycle. The Committee agreed that vesting would be calculated using an equal balance of actual and constant exchange rates to ensure the LTIP outcome reflects both actual results and controllable performance. The Committee, having debated the various approaches in these

circumstances, is satisfied that this outcome is fair to participants and will use the same approach going forward, noting that exchange rate movements could have the effect of adjusting the results both up or down.

Plans for 2016The Committee has considered the implications of Solvency II on the governance of pay at Bupa and we have refined our Terms of Reference to ensure they are consistent with the legislation, including strengthening the level of input from the Risk Committee and the Chief Risk Officer in considering how risk management should impact pay. We have also reviewed how the regulations might impact the structure of pay.

We decided to award salary increases of 2.5% to the CEO and the CFO, effective from April 2016. These increases are in line with the average for the wider workforce.

The annual bonus for 2016 is based on broadly the same structure as that in 2015 with modest changes to the non-financial metrics around customer, people, risk and cost efficiency. This move towards a balanced scorecard approach will be fully reflected in the 2017 annual bonus which is under review this year. The 2016-2018 LTIP awards continue to be based on stretching three-year profit, revenue and non-financial metrics, the structure of which was first introduced for the 2014-2016 awards. The target will be set each year for the three years of the plan. More details can be found on page 59.

We appointed Mercer as our new advisors in 2015, following a competitive tendering process. Mercer attend Committee meetings and provide advice on all remuneration matters. They have already made a very positive impact and through 2016 will be helping to review the structure of the annual bonus and LTIP to ensure they reflect best practice, incorporate features as required by Solvency II, and reinforce the appropriate behaviours. Any changes to the plans will be disclosed in the 2016 Directors’ Remuneration Report and become effective in 2017.

Martin Houston Committee Chairman

2 March 2016

On behalf of the Board, the Remuneration Committee is pleased to present the Directors’ Remuneration Report for 2015. In last year’s Remuneration Report, we set out some principles which guide our decisions and we believe it is appropriate to state them once again:

1. We follow best FTSE practice;

2. In all but exceptional cases, we follow UK corporate governance regulations, guidelines, codes and rules as though we were a FTSE listed company; and

3. We must have the right processes in place for determining executive pay, for engaging in robust challenge and debate and, as a result, ensuring we pay for performance.

Remuneration Report

Martin HoustonCommittee Chairman

This year the Committee focused on improving overall

remuneration governance, the effectiveness of the

Committee and preparing for the Solvency II regime.

Page 54: Longer, healthier, happier lives

52Bupa Annual Report 2015

Governance Report

Policy

Remuneration report continued

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

Pay policy table – Executive Directors

ElementPurpose and link to strategy Operation Maximum opportunity Performance metrics

Base salary Core element of remuneration set to attract and retain Executive Directors, reflecting their role and contribution.

Salary levels are reviewed annually with any changes becoming effective in April. Factors taken into account include:

° Level of skill, experience and scope of responsibilities of the individual;

° Overall business performance, scarcity of talent, economic climate and market conditions;

° Increases across Bupa; and

° External market data.

Salary increases are normally in line with those of the Bupa employee population.

Larger increases may be given in certain circumstances including where a new recruit has been appointed on lower than market rate salary with the expectation of phased increases to bring it up to market level.

The Committee does not consider it appropriate to set a maximum salary level.

None

Annual bonus To drive behaviour and to promote focus on the business priorities for the year.To motivate and incentivise delivery of performance over the one-year operating cycle.

Bonus levels and the appropriateness of measures and weightings are reviewed annually to ensure they continue to support the business strategy.

Performance over the financial year is measured against stretching financial and non-financial performance targets set at the start of the financial year.

Typically 50% of any bonus awarded will be deferred for a period of up to three years, with the remaining 50% paid in cash. To account for any loss of value over time, a modest uplift will be applied to the deferred amount.

The maximum bonus opportunity will not exceed 150% of base salary.

Annual bonus payments are based on the achievement of challenging financial, non-financial and personal objectives.

No less than 75% of the annual bonus will be subject to the achievement of financial measures which will be aligned to the strategic priorities of the business.

Long-term incentive plan

To motivate and incentivise delivery of sustained performance over the long term aligned to Bupa’s purpose and strategic objectives.

As Bupa cannot provide incentives based on equity participation, it provides an LTIP in the form of a deferred cash incentive that is broadly reflective of equity-based plans in comparable companies.

Awards are usually made on an annual basis and relate to performance over a three-year period.

Vesting of awards is based on the extent to which performance targets, set and assessed by the Committee, are achieved.

Any payments will be made at the end of the performance period and a portion may be deferred for up to two years.

The maximum award will not exceed 275% of base salary.

Vesting of awards is based on performance against a combination of financial and non-financial measures.

Threshold performance results in a payment of 15% of the maximum.

No less than 75% of the LTIP will be based on financial measures with the remainder based on measures linked to key strategic priorities of the business.

Pension To provide an income after retirement, health security and family protection benefits.

For the current Executive Directors and new appointments, the Company operates a defined contribution pension scheme, called The Bupa Retirement Savings Plan. Executive Directors have the option to take any employer contribution as a cash allowance or a combination of pension and cash allowance.

Although the Company has closed its UK defined benefit scheme (The Bupa Pension Scheme) to new members, a small number of current employees continue to accrue benefits under this plan.

Executive Directors who are eligible to be members of The Bupa Retirement Savings Plan receive employer contributions of up to 30% of base salary.

Members of The Bupa Pension Scheme accrue benefits in line with their contractual terms up to a maximum of 1/30th accrual.

None

Benefits To attract and retain Executive Directors by providing health and wellbeing benefits and providing security for families.

Executive Directors are entitled to a number of taxable benefits which may include private health cover for themselves and their family, an annual health assessment for themselves and their partner, life assurance, income protection insurance, car allowance and 30 days’ annual holiday. The CEO is also entitled to the use of a car and driver.

The benefits offered may need to be changed from time to time to reflect changing circumstances.

There is no specific maximum benefit spend. None

Page 55: Longer, healthier, happier lives

53Bupa Annual Report 2015

Governance Report

Malus and clawbackMalus and clawback provisions may be operated at the discretion of the Committee in respect of awards granted under the annual bonus and LTIP. Malus (under which awards may be reduced, cancelled or made subject to additional conditions) may be applied prior to the satisfaction of the award. Clawback (requiring a repayment of cash which has been delivered) may be operated for up to three years following payment of the non-deferred element of the annual bonus and five years from grant for the LTIP.

Circumstances in which the operation of these provisions may be considered include:

° Misstatement of results;

° An error in assessing any relevant performance metric or in the information or assumptions on which the annual bonus or LTIP is determined;

° Serious reputational damage to Bupa or a relevant business unit;

° A scenario in which significant risk has been taken which is outside of Bupa’s or a relevant business unit’s risk appetite;

° Gross misconduct or material breach of employment contract; and

° Any other circumstance which the CEO or the Remuneration Committee in its discretion considers to be similar in nature or effect to the above.

Remuneration Committee discretionThe Remuneration Committee has ultimate discretion in relation to payments to Executive Directors under the Company’s incentive plans. With respect to the annual bonus, if the Committee determines that a minimum level of performance has not been achieved, no bonus will be payable; and with respect to the LTIP, the Committee may adjust the level of vesting to ensure that it is aligned to the underlying performance of the business.

Pay policy table – Executive Directors

ElementPurpose and link to strategy Operation Maximum opportunity Performance metrics

Base salary Core element of remuneration set to attract and retain Executive Directors, reflecting their role and contribution.

Salary levels are reviewed annually with any changes becoming effective in April. Factors taken into account include:

° Level of skill, experience and scope of responsibilities of the individual;

° Overall business performance, scarcity of talent, economic climate and market conditions;

° Increases across Bupa; and

° External market data.

Salary increases are normally in line with those of the Bupa employee population.

Larger increases may be given in certain circumstances including where a new recruit has been appointed on lower than market rate salary with the expectation of phased increases to bring it up to market level.

The Committee does not consider it appropriate to set a maximum salary level.

None

Annual bonus To drive behaviour and to promote focus on the business priorities for the year.To motivate and incentivise delivery of performance over the one-year operating cycle.

Bonus levels and the appropriateness of measures and weightings are reviewed annually to ensure they continue to support the business strategy.

Performance over the financial year is measured against stretching financial and non-financial performance targets set at the start of the financial year.

Typically 50% of any bonus awarded will be deferred for a period of up to three years, with the remaining 50% paid in cash. To account for any loss of value over time, a modest uplift will be applied to the deferred amount.

The maximum bonus opportunity will not exceed 150% of base salary.

Annual bonus payments are based on the achievement of challenging financial, non-financial and personal objectives.

No less than 75% of the annual bonus will be subject to the achievement of financial measures which will be aligned to the strategic priorities of the business.

Long-term incentive plan

To motivate and incentivise delivery of sustained performance over the long term aligned to Bupa’s purpose and strategic objectives.

As Bupa cannot provide incentives based on equity participation, it provides an LTIP in the form of a deferred cash incentive that is broadly reflective of equity-based plans in comparable companies.

Awards are usually made on an annual basis and relate to performance over a three-year period.

Vesting of awards is based on the extent to which performance targets, set and assessed by the Committee, are achieved.

Any payments will be made at the end of the performance period and a portion may be deferred for up to two years.

The maximum award will not exceed 275% of base salary.

Vesting of awards is based on performance against a combination of financial and non-financial measures.

Threshold performance results in a payment of 15% of the maximum.

No less than 75% of the LTIP will be based on financial measures with the remainder based on measures linked to key strategic priorities of the business.

Pension To provide an income after retirement, health security and family protection benefits.

For the current Executive Directors and new appointments, the Company operates a defined contribution pension scheme, called The Bupa Retirement Savings Plan. Executive Directors have the option to take any employer contribution as a cash allowance or a combination of pension and cash allowance.

Although the Company has closed its UK defined benefit scheme (The Bupa Pension Scheme) to new members, a small number of current employees continue to accrue benefits under this plan.

Executive Directors who are eligible to be members of The Bupa Retirement Savings Plan receive employer contributions of up to 30% of base salary.

Members of The Bupa Pension Scheme accrue benefits in line with their contractual terms up to a maximum of 1/30th accrual.

None

Benefits To attract and retain Executive Directors by providing health and wellbeing benefits and providing security for families.

Executive Directors are entitled to a number of taxable benefits which may include private health cover for themselves and their family, an annual health assessment for themselves and their partner, life assurance, income protection insurance, car allowance and 30 days’ annual holiday. The CEO is also entitled to the use of a car and driver.

The benefits offered may need to be changed from time to time to reflect changing circumstances.

There is no specific maximum benefit spend. None

Page 56: Longer, healthier, happier lives

54Bupa Annual Report 2015

Governance Report

The remuneration policy table on pages 52 and 53 sets out the various components which would be considered for inclusion in the remuneration package for the appointment of an Executive Director. Typically a new appointment will have (or be transitioned onto) the same framework that applies to other Executive Directors as set out in the policy table. Salary would reflect the skills and experience of the individual, and may be set at a level to allow future salary progression to reflect performance in the role.

It would be expected that the structure and quantum of the variable pay elements would reflect those set out in the policy table.

The Committee reserves the right to make any remuneration payments or payments for loss of office where the terms of the payment were agreed (i) before the remuneration policy came into effect or (ii) at a time when the relevant individual was not a director of the Company and, in the opinion of the Committee, the payment was not in consideration for the individual becoming a director of the Company.

To facilitate recruitment, the Committee may make compensatory payments and/or awards for any remuneration arrangements subject to forfeit on leaving a previous employer. We will seek to replicate, as far as practicable, the potential value and time horizon of such remuneration, as well as performance conditions that may apply. In some circumstances, it might also be necessary to set up additional or alternative arrangements including but not limited to:

° Relocation-related expenses; and

° International assignment allowances and expenses.

In the case of internal promotions, any commitments made before appointment may continue to be honoured unless an alternative approach, more closely aligned to the prevailing policy, is agreed by the Remuneration Committee.

Any special joining arrangement payments may include clawback tied to leaving within a certain period.

Service contracts for Executive Directors Executive Directors have a 12-month rolling employment contract. The notice requirements are 12 months on either side, which may be payable in lieu. The contracts also include specific post-termination restrictions. Executive Directors are usually permitted, subject to approval, to have one external Non-Executive Director role and to accept and retain the fee for this appointment. This is on the basis that any external appointment does not give rise to a conflict of interest.

Performance measures and target settingThe performance measures for the annual bonus are aligned to delivery of Bupa’s annual operating plan and may include personal objectives that change from year to year.

Targets for the LTIP are set by the Remuneration Committee taking into account a number of internal and external reference points which include historic Bupa performance, internal forward-looking plans and broader market trends. Targets are set for vesting at threshold, ‘on-target’ and out-performance levels.

Illustrations of the application of the remuneration policyBupa aims to provide a balance of fixed and variable compensation that provides stability while also incentivising superior business performance. At target, over 50% of Executive Directors’ remuneration is based on individual and company performance.

The graphs illustrate the possible variation for different levels of performance. The percentages represent each element as a percentage of base salary.

Approach to remuneration policy Our approach to remuneration on recruitment is to pay no more than is necessary and appropriate to attract the right talent to the role.

0

500

1000

1500

2000

2500

3000

3500

4000

4500

Potential maximumOn targetFixed pay Potential maximumOn targetFixed pay

LTIP Annual bonus Other benefits Pension Salary

100%

137.5%

275%

150%

100%

200%

112.5%75%

Remuneration at various performance levels (£’000)

Chief Executive Ocer Chief Financial Ocer

Policy

Remuneration report continued

Page 57: Longer, healthier, happier lives

55Bupa Annual Report 2015

Governance Report

Policy on payments for loss of officeIn the table to the right, we summarise the key elements of our policy on payment for loss of office, which will comply with the relevant plan rules and will consider local employment legislation.

Any payments made due to loss of office may include malus or clawback provisions as described under malus and clawback on page 53.

Differences in remuneration policy for Executive Directors compared with other employeesThe Remuneration Policy for the Executive Directors is designed to be broadly similar to the policy applicable to Bupa employees to ensure that they are all aligned to delivering sustainable business performance. Although the size of the opportunity varies, the underlying principles of the salary review cycle, annual bonus and LTIP remain the same  for the senior employee population.

Junior employees are not eligible for LTIP awards, although most have an annual bonus opportunity. In some cases, additional flexibility has been introduced for the Executive Directors and senior employees (e.g. to provide the choice to receive cash in lieu of pension contributions) to allow for personal circumstances.

Service contracts for Non-Executive DirectorsTerms of engagement for the Non-Executive Directors of Bupa set out the fees and benefits to which they are entitled as well as the expectation of the time commitment required to effectively perform their role. Copies of the standard terms of engagement are available on bupa.com.

The table to the right describes the pay policy as it applies to the Chairman and Non-Executive Directors.

Policy on payments for loss of office

Provision Policy

Notice period and compensation for loss of office in service contracts

° 12 months’ notice from the Company to the Executive Director.

° Up to 12 months’ base salary (in line with the notice period). Notice period payments will either be made as normal (if the Executive Director continues to work during the notice period or is on garden leave) or at the termination date for any unexpired notice period.

Treatment of annual bonus on loss of office under plan rules

° The Committee may make an annual bonus payment for the year of cessation depending on the reason for leaving. Typically, the Committee will take into consideration the period served during the year and the individual’s performance up to cessation. Any such payment is at the discretion of the Committee.

° If an Executive Director leaves the Company after the end of the financial year but before the bonus payment date, for reason of redundancy, pre-agreed retirement, death, or as part of the sale of a Bupa business, they will be eligible for a bonus payment for the previous financial year. For any other reason, they will not be eligible for a bonus payment.

° Any bonus will be paid at the normal time following the end of the bonus year.

Treatment of LTIP on loss of office under plan rules

° An Executive Director’s award will vest in accordance with the terms of the plan and satisfaction of performance conditions measured at the normal completion of the performance period if the reason for leaving is redundancy, pre-agreed retirement, early retirement on the grounds of ill health, death or any other special circumstance agreed by the Committee. In these cases, final awards will be pro-rated based on completed months of service, in 36ths for the actual period of active employment during the plan performance period. The period of active employment excludes any period of garden leave or other such period when the Executive Director was legally employed but not required to actively carry out their duties. For any other reason, they will not be eligible for an LTIP payment.

° Any LTIP payment will be paid at the normal time, e.g. in April following the end of the performance period, or two years later for any deferral.

Pension and benefits

° Generally pension and benefit provisions will continue to apply until the termination date.

Pay policy table – Non-Executive Directors

ElementPurpose and link to strategy Operation

Fees To attract and provide stability, reflecting the complexity of the role and time commitment required

The Chairman receives an all inclusive fee.NEDs receive a fixed basic fee. Additional fees are paid for chairing and membership of Board Committees and/or additional work in relation to subsidiaries, and for the Senior Independent Director role.Fees are reviewed annually by the Board with any changes implemented in July. Key factors taken into account include:

° Overall business performance;

° Scope and responsibility of the role; and

° Appropriate market data.

Benefits To provide health and wellbeing benefits aligned with Bupa’s purpose

During their time in office, NEDs are entitled to private health cover for themselves and their family and an annual health assessment for themselves and their partner. The Chairman is also entitled to the use of a car and driver. All benefits are taxable.

Page 58: Longer, healthier, happier lives

56Bupa Annual Report 2015

Governance Report

Executive Directors: single total figure of remuneration (£’000)

Stuart Fletcher Evelyn Bourke

2015 2014 2015 2014

Salary 730 711 523 484

Benefits 48 43 16 13

Annual bonus 681 882 382 464

LTIP 403 963 215 219

Pension 219 213 157 145

Total 2,081 2,812 1,293 1,325

Notes

Annual bonus refers to bonus payments earned during that year, and LTIP refers to payouts from the performance period which ended in that year.

Stuart Fletcher’s salary was £735,000 from 1 April 2015 and he received cash in lieu of a pension.

Evelyn Bourke’s salary was £535,000 from 1 April 2015 and she received cash in lieu of a pension. Her 2013-2015 LTIP award includes an additional on-target award of £85,000 which was a contractual commitment made at the time of her appointment in September 2012. She is a Non-Executive Director of IFG and received a fee of £32,666 in respect of her position, which is not disclosed in the table above.

2015 Annual bonus payout

CEO CFO

On Target Performance

Level (£m)

Actual Performance

Level (£m)

Max bonus (% of

salary)

Actual payout

(% of salary)

Max bonus (% of

salary)

Actual payout

(% of salary)

Group profit 671.3 666.2 75.0% 46.2% 56.3% 34.7%

Group revenue 11,216.9 11,094.6 37.5% 22.3% 28.1% 16.7%

Key personal objectives 37.5% 24.1% 28.1% 20.0%

Total 150.0% 92.6% 112.5% 71.4%

Financial targets are assessed at constant exchange rates, set at the start of the year.

The Committee assessed the profit and revenue elements against the targets set at the start of the year and are comfortable that the amounts earned reflect Bupa’s underlying financial performance.

The financial targets for the annual bonus, and actual performance of the Company are shown in the table above. For both Executive Directors, their achievement against key personal objectives was assessed independently by the Committee.

The payout reflects the steady progress that has been made in the face of challenging economic conditions and political and regulatory changes in a number of our markets. By focusing on meeting the needs of customers across our diversified geographic footprint covering health and care provision as well as health insurance, we maintained strong market positions and grew revenue by 6% at CER and customer numbers by 12% in 2015.

We delivered underlying profit growth across most of Bupa, however, group underlying profit has declined by 2% at constant exchange rates, reflecting the impact of a change in sentiment towards private participation in public healthcare in Spain which has led to a significant change in outlook for our PPPs.

Performance assessment for the CEO and CFO includes the consideration of achievement against financial, non-financial and personal objectives. For the CEO, calibration of delivery of personal objectives included those covering executive leadership development, strengthening of talent and succession pipelines, digital development, focus on risk and governance and growing the impact and reputation of Bupa externally. For the CFO, consideration was given to the drive for cash delivery, capital management, readiness for Solvency II and Senior Insurance Managers Regime regulation implementation, business development along with management of risk, control and governance.

Detail of performance against metrics for variable awardsFor 2015, the CEO’s target bonus opportunity was 100% of salary with a maximum of 150% of salary. The CFO’s target bonus opportunity was 75% of salary with a maximum of 112.5% of salary. The performance measures used to determine the 2015 annual bonus for our Executive Directors were as follows:

° Group profit (50% of award) – similar to underlying profit before taxation, with the most significant differences being the inclusion of restructuring and transaction costs on acquisitions and disposals;

° Group revenue (25% of award) – includes Bupa’s proportionate share of revenue from associates and joint ventures, which is not included within reported revenue; and

° Key personal objectives (25% of award).

The Implementation Report sets out details of Executive Directors’ pay and shows how the Executive Directors’ remuneration policy has been implemented in 2015 and how it will be applied for 2016. As well as disclosing remuneration figures for the Executive Directors, it includes details on the degree to which performance targets have been achieved and the resulting level of annual bonus payout and vesting of long-term awards.

Set out to the right is a table showing a single total figure of remuneration for each Executive Director in 2015. Comparable figures for 2014 are also included in this table.

Implementation (audited)

Remuneration report continued

Page 59: Longer, healthier, happier lives

57Bupa Annual Report 2015

Governance Report

2013-2015 LTIP vestingVesting of the 2013-2015 LTIP is based on performance over the three-year period ending 31 December 2015. Performance is assessed against targets for growth in the income and expenditure reserve (75% weighting) and risk adjusted profit (25% weighting).

In determining the vesting outcome, the Committee took into account the significant decline in the Australian dollar versus Sterling over the three-year period and its impact on the achievability of the targets set at the start of the cycle. The Committee agreed that vesting would be calculated using an equal balance of actual and constant exchange rates to ensure the LTIP outcome reflects both actual results and controllable performance. The Committee, having debated the various approaches in these circumstances, is satisfied that this outcome is fair to participants.

Over the performance period, the income and expenditure reserve grew to a total of £1,488.5m compared to the target of £1,604.7m. Risk adjusted profit grew to a total of £104.5m compared to the target of £161.2m.

Overall, this led to a calculated payout of 38.4% of the target award, 29.5% of the maximum award. The Committee determined this was an appropriate payout level.

Interests awarded during 2015During the year, LTIP awards for the 2015-2017 Plan were made to the Executive Directors. The Plan covers the three-year performance period to 31 December 2017. Subject to the achievement of performance conditions, up to 50% of the award may be paid in April 2018 with any excess being deferred for a further two years. Deferred awards are subject to an uplift equivalent to the Bank of England base rate.

Approximately 250 senior managers across Bupa participate in the plan, based on the same framework as the Executive Directors, with award levels calculated as a percentage of salary which is scaled down based on their level of seniority and accountability. Vesting of the awards is dependent upon performance against specific financial and non-financial measures over a three-year performance period.

Profit after tax is weighted at 75% and revenue is weighted at 15%. In order for any level of payout to occur for revenue performance achievement, a performance gateway applies in that the profit after tax threshold must be achieved. The remaining 10% weighting for the LTIP is based on the achievement of quality and sustainability measures (non-financial measures) which cover key customer, people and culture, and sustainability measures.

The targets and weightings for both the financial and non-financial measures comprising the 2015 awards are set out in the tables above.

Financial targets 2015-2017 LTIP (90% weighting)

Profit after tax Weighted 75%

Revenue Weighted 15%

Below threshold performance 0% vesting

< 7% p.a. < 5% p.a.

Threshold performance 15% vesting

7% p.a. 5% p.a.

On-target performance 50% vesting

10% p.a. 8% p.a.

Out-performance 100% vesting

20% p.a. 17% p.a.

Growth is measured as a compound annual growth rate.

Straight-line vesting occurs between the discrete levels of achievement.

Non-financial targets 2015-2017 LTIP (10% weighting)

0% vesting Outcomes and improvements are significantly below expectations

30% – 70% vesting Outcomes and improvements are broadly in line with expectations

70% – 100% vesting Outcomes and improvements are significantly above expectations

The table below shows the detail of the awards made to the Executive Directors in the year.

Long-Term Incentive Plan

Scheme type 2015-2017 Long-Term Incentive Plan

CEO CFO

Basis of award 275% of base salary 200% of base salary

Face value of award (100% of award) £1,963,500 £973,750

Amount that would vest at on-target performance (50% of award)

£981,750 £486,875

Amount that would vest at threshold performance (15% of award)

£294,525 £146,063

Date performance period ends 31 December 2017

Payment due date April 2018, and April 2020 (if applicable)

Page 60: Longer, healthier, happier lives

58Bupa Annual Report 2015

Governance Report

Historical payout tableThe table to the right shows levels of payout to the CEO against the maximum opportunity for the last five years.

Historical payout

Year CEO

Single figure of total

remuneration (£’000)

Annual bonus payout against

maximum opportunity %

Long-term incentive vesting

rates against maximum

opportunity %

2015 Stuart Fletcher 2,081 62% 30%

2014 Stuart Fletcher 2,812 82%1 71%

2013 Stuart Fletcher 1,703 71% N/A2

20123 Stuart Fletcher 1,670 100% N/A2

20123 Ray King 1,797 67% 83%

2011 Ray King 3,099 67% 83%

1 Annual bonus payout against maximum opportunity for 2014 has been corrected. The previously disclosed figure, 124%, was the actual payout as a percentage of salary.

2 Stuart Fletcher did not receive payouts from these plans. However, the payment to other eligible participants was 83% in 2012 and 84% in 2013.

3 Stuart Fletcher joined Bupa on 1 March 2012 and Ray King retired on 30 June 2012.

Percentage change in remuneration of the CEO

CEO Employees

Salary 2.9% 2.7%

Benefits (excluding pensions) 11.6% No material change

Short-Term Incentives (22.8%) 7.1%

* The UK salaried population refers to the UK-based permanent employees whose records are held on the HR database.

Relative importance of spend on pay

2015 (£m)

2014 (£m)

Difference (£m)

Remuneration paid to all employees 1,653.7 1,562.0* 91.7

Cash flow used in investing activities 695.3 372.7 322.6

* 2014 Remuneration paid to all employees has been restated. Please refer to Note 2.3 to the Financial Statements.

Percentage change in remuneration of the CEOThe table to the right shows the change in salary, benefits and short-term incentives (annual bonus) for the CEO in 2015 compared to 2014 alongside a corresponding average figure for the Bupa employee comparator group. The UK salaried population* has been chosen as the comparator group as the market trends and economic environment are most closely aligned to a UK-based CEO.

Relative importance of spend on payThe table to the right shows the relative importance of spend on pay. Given that Bupa does not have shareholders and therefore does not pay dividends, cash flow used in investing activities has been shown as an alternative measure.

Implementation (audited)

Remuneration report continued

Page 61: Longer, healthier, happier lives

59Bupa Annual Report 2015

Governance Report

Statement of implementation of remuneration policy in 2016In the current financial year (2016) Bupa intends to implement the remuneration policy as described in the Pay Policy Table on pages 52-53.

The CEO and CFO’s salaries were reviewed by the Committee and they have determined that with effect from 1 April 2016 their new annual base salaries will be £753,375 (2.5% increase) and £548,500 (2.5% increase) respectively. Both salary increases are in line with the average increase for the wider workforce.

The annual bonus was reviewed during 2015 to ensure it remained aligned with Bupa’s strategy and best practices from the Listed market. The revised plan will operate from 1 January 2016. The main changes for the Executive Directors were to introduce non-financial metrics based on customer, people, risk and cost efficiency.

The target and maximum individual opportunities remain unchanged (i.e. the CEO's target bonus is 100% of salary and the CFO’s is 75% of salary, both with a maximum of 150% of the target opportunity). The financial performance measures and weightings remain unchanged for the CEO and CFO.

The LTIP for 2016-2018 remains similar to the plan for 2015-2017. It is intended that an award of £2,021,250 (275% of salary at the time of award) is made to the CEO and an award of £1,070,000 (200% of salary at the time of award) is made to the CFO. The fair (on-target) value of these awards is £1,010,625 (137.5% of salary) for the CEO and £535,000 (100% of salary) for the CFO.

Performance targets for growth in profit after tax and revenue are set annually and performance will then be assessed based on three-year performance at the end of the three-year period.

Due to the commercially sensitive nature of  these annual targets, the figures will be disclosed at the end of the performance period.

Non-Executive Directors: single total figure of remuneration (£’000)

Fees Benefits1 Total

2015 2014 2015 2014 2015 2014

Lord Leitch (Chairman) 345 330 40 45 385 375

Lawrence Churchill 150 118 16 1 166 119

Rita Clifton 70 66 6 1 76 67

Roger Davis2 31 1 32

Martin Houston 87 73 56 1 143 74

John Lorimer3 65 117 5 1 70 118

George Mitchell4 32 169 9 1 41 170

Prof Sir John Tooke 84 79 2 1 86 80

Clare Thompson5 86 – 86

Total 950 952 135 51 1,085 1,003

1 Travel and subsistence expenses for attending meetings at Bupa House are treated as taxable income, all Non-Executive Director expenses in relation to this are grossed up to meet the costs of the additional tax and NIC. The benefits figures for 2015 reflect this revised approach.

2 Roger Davis was appointed as a Non-Executive Director on 16 July 2015. 3 John Lorimer ceased to be a Non-Executive Director with effect from 30 June 2015.4 George Mitchell ceased to be a Non-Executive Director with effect from 14 May 2015.5 Clare Thompson was appointed as a Non-Executive Director on 1 May 2015.

Page 62: Longer, healthier, happier lives

60Bupa Annual Report 2015

Governance Report

Attendance

12 Feb 24 Feb Jul Sep Dec

Martin Houston

Lawrence Churchill1 – –

Rita Clifton

Lord Leitch

George Mitchell2 – – –

1 Lawrence Churchill was appointed to the Committee on 1 July 2015.2 George Mitchell stepped down from the Committee on 14 May 2015.

Items covered included:

February Annual Reward Review – CEO, CFO and BET/LTIP Payout Level for 2012-2014

July 2015 Management Bonus Scheme and 2015-17 LTIP Rules/Subsidiary Non Executive Director Fees

September 2016 Management Bonus Scheme Design/Appointment of New Committee Advisors/Solvency II

December Review of committee effectiveness/Regulatory Update/Committee Terms of Reference Review/CEO, CFO and Bupa Executive Team benchmarking

Plans for 2016During 2016, we intend to review our annual bonus scheme and long-term incentive plan, with consideration given to linking the measures more closely to Bupa’s strategic measures.

Voting at the Annual General MeetingThe Association Members will be invited to vote at the Annual General Meeting on 11 May 2016 on the Implementation Report.

Remuneration CommitteeMartin Houston has chaired the Committee since 11 June 2014.

In addition to the Company Secretary, regular attendees at the Remuneration Committee meetings who have provided comment and advice were the CEO, the CFO, the Chief People Officer and the Reward Director.

The Committee reviews the quality and independence of their advisors on a regular basis. Deloitte acted as our independent advisors for the first part of 2015, with the Committee appointing a new advisor, Mercer, from September 2015 who attended the Remuneration Committee meetings from December 2015.

Mercer is a member of the Remuneration Consultants’ Group and voluntarily operates under their code of conduct when providing advice on executive remuneration in the UK. The total fees paid to Deloitte for the provision of independent advice to the Committee in 2015 were £26,950, charged on a time and materials basis. The total fees paid to Mercer for the provision of independent advice to the Committee in 2015 were £84,888, charged on a time and materials basis.

The Terms of Reference for the Committee were reviewed by the Committee in December 2015 and adopted by the Board in February 2016. A copy of the Committee’s Terms of Reference is available on bupa.com.

Implementation (audited)

Remuneration report continued

Page 63: Longer, healthier, happier lives

34-35. Clare Thompson and Roger Davis were appointed as Non-Executive Directors with effect from 1 May and 17 July 2015 respectively. Simon Blair and Janet Voûte were appointed on 12 January 2016. George Mitchell stepped down from the Board at the AGM on 14 May 2015 and John Lorimer retired from the Board on 30 June 2015.

As at the date of this report, indemnities are in force under which the Company has agreed to indemnify the directors and certain senior managers, to the extent permitted by law and the Company’s articles of association, in respect of all losses arising out of, or in connection with, the execution of their powers, duties and responsibilities, as directors of the Company or any of its subsidiaries.

Going concernThe directors confirm that they are satisfied that the Company and the Group has adequate resources to continue in operation for the foreseeable future. Accordingly, they continue to adopt a going concern basis in preparing the financial statements.

Political contributionsNo political donations were made, nor any political expenditure incurred.

Employment policiesBupa continues to regard communication with its employees as a key aspect of its policies. Information is given to employees about employment matters and about the financial and economic factors affecting the Company’s performance through a wide range of channels to ensure accessibility by all. Employees are encouraged to discuss operational and strategic issues with their line manager and to make suggestions aimed at improving performance. Appropriate channels are available to employees to raise or escalate concerns confidentially. Every effort is made by the directors and management to inform, consult and encourage the full involvement of staff on matters concerning them as employees and affecting the Company’s performance and schemes exist to incentivise, recognise and reward performance.

Bupa is committed to providing equal opportunities to employees. The employment of disabled persons is included in this commitment; and the recruitment, training, career development and promotion of disabled persons is

The Strategic Report and the audited Financial Statements are presented on pages 1-30, and from page 63, respectively. The Governance Report on pages 31-60, including the Remuneration Report on pages 51-60 all form part of this report.

The directors have chosen, in accordance with section 414C(11) of the Companies Act 2006, to set out in the Strategic Report on pages 1-30 the following information which would otherwise be required by Schedule 7 of the Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008 to be disclosed in the Directors’ Report: Disclosures concerning Greenhouse Gas Emissions.

Financial resultsThe results of the Group for 2015 are reported on pages 63-134. The profit for the financial year of £278.3m (2014: profit £522.8m) has been transferred to equity.

Acquisitions and disposalsDetails of the acquisitions and disposals made during the year are shown in Note 4.0.

Board of DirectorsThe Board is responsible for the good standing of the Company, the management of its assets, including the management of risk and the strategy for its future development. There are 11 Board meetings each year and other meetings are convened as needed.

Biographical details of the Non-Executive Chairman, two Executive Directors and six Non-Executive Directors who held office at the end of the year, are set out on pages

based on the aptitudes and abilities of the individual. Should employees become disabled during employment, every effort would be made to continue their employment and, if necessary, appropriate training would be provided.

Disclosure of information to auditorsThe directors who held office at the date  of approval of this directors’ report confirm that, so far as they are each aware, there is no relevant audit information of which the Company’s auditors are unaware; and each director has taken all the steps which they ought to have taken as a director to make themselves aware of any relevant audit information, and to establish that the Company’s auditors are aware of that information.

AuditorsA resolution to reappoint KPMG LLP as auditors will be put to the forthcoming Annual General Meeting of the Company.

Health and safetyThere were 6,954 employee incidents in total for 2015. This equates to 8.1 incidents per 100 employees, a 2% reduction compared to the 2014 employee incident rate. In the UK, there were 78 RIDDOR (Reporting of Injuries, Diseases and Dangerous Occurrences Regulations 2013) reportable incidents in 2015, a 10% decrease from 2014. During 2015 we have been implementing lost-time injury reporting across Bupa to further strengthen our ability to understand the causes and impact of harm to our people and businesses. Going forward we will be using the lost-time injury frequency rate to report our performance in the annual report.

By order of the Board.

Julian Sanders Company Secretary

2 March 2016

Company number: 432511

The directors of The British United Provident Association Limited (‘Bupa’) present their

reports and the financial statements for the year

ended 31 December 2015.

Report of the  Board of Directors

61Bupa Annual Report 2015

Governance Report

Page 64: Longer, healthier, happier lives

In respect of the annual report and the financial statementsThe directors are responsible for preparing the Annual Report and the Group and Parent Company financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare Group and Parent Company financial statements for each financial year. Under that law they have elected to prepare the Group and the Parent Company financial statements in accordance with IFRS as adopted by the EU and applicable law.

Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Parent Company and of their profit or loss for that period. In preparing each of the Group and Parent Company financial statements, the directors are required to:

° Select suitable accounting policies and then apply them consistently;

° Make judgements and estimates that are reasonable and prudent;

° State whether they have been prepared in accordance with IFRS as adopted by the EU; and

° Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Parent Company will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Parent Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Parent Company and to enable them to ensure that its financial statements comply with the Companies Act 2006. They have a general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

The directors consider that the Annual Report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for Association Members to assess the Group’s position and performance, business model and strategy.

The directors have decided to prepare, voluntarily, a Directors’ Remuneration Report in accordance with Schedule 8 to The Large 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 Listing Rules, the Disclosure Rules 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.

Statement of Directors’

Responsibilities

62Bupa Annual Report 2015

Governance Report

Page 65: Longer, healthier, happier lives

63Bupa Annual Report 2015

Financial Statements

Accounting policies that are relevant to the financial

statements as a whole are described in Section 1

‘Basis of preparation’. Thereafter, the notes to the financial statements

have been presented under five key headings:

‘Results for the year’,  ‘Operating assets and liabilities’,

‘Group Investments’, ‘Risk management and Capital management’,

and ‘Other notes’.

For The British United Provident Association

Limited on a standalone basis (the ‘Company’) primary

statements and associated notes are set out in Section 7.

Each section sets out the relevant accounting policies

applied in producing the notes, along with disclosures

of any key judgements and estimates used.

Independent Auditor’s report 64

Primary statements 66

Section 1 – Basis of preparation 71

Section 2 – Results for the year

Operating segments 73Revenues 75Insurance claims 76Other operating expenses 77 Other income and charges 78 Financial income and expenses 78 Taxation expense 79

Section 3 – Operating assets and liabilities

Working capital 80Intangible assets 82Property, plant and equipment 85Investment properties 89Provisions and other liabilities under insurance contracts issued 90Provisions for liabilities and charges 92Post employment benefits 93Deferred taxation assets and liabilities 96

Section 4 – Group Investments

Business combinations and disposals 98Equity accounted investments 101

Section 5 – Risk management and Capital management

Financial investments 103Borrowings 106Derivatives 108Capital management 108Risk management 109Insurance risk 109Market risk 110Credit risk 114Liquidity risk 116

Section 6 – Other notes

Related party transactions 117Commitments and contingencies 118

Section 7 – Company primary statements and associated notes

Primary statements 119Intangible assets 122Property, plant and equipment 122Investment properties 123Post employment benefits 123Provisions for liabilities and charges 125Working capital 125Risk management 126Deferred taxation assets and liabilities 126Related party transactions 127Commitments and contingencies 128Investment in subsidiaries 128

Section 8 – Non-controlling interests 132

Section 9 – Five year financial summary 133

Financial Statements

Page 66: Longer, healthier, happier lives

64Bupa Annual Report 2015

Independent Auditor’s Report

Our opinion on the financial statements is unmodified We have audited the financial statements of The British United Provident Association Limited for the year ended 31 December 2015 set out on pages 66 to 132. In our opinion:

° the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2015 and of the group’s profit for the year then ended;

° the group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS as adopted by the EU);

° the parent company financial statements have been properly prepared in accordance with IFRS as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and

° the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.

Our assessment of risks of material misstatement In arriving at our audit opinion above on the financial statements the risks of material misstatement that had the greatest effect on our audit, in decreasing order of audit significance, were as follows:

Carrying value of goodwill in Bupa Care Services UK & New Zealand, Bupa Chile and Quality HealthCare businesses £361.7m (2014: £480.1m) Refer to page 45 (Audit Committee Report) and Section 3.1

° The risk – goodwill impairment reviews within the Bupa Care Services UK and New Zealand cash-generating units are complex and typically require a high level of judgement as growth in some markets has slowed in recent years and the cost base in the care services sector may increase faster than revenues, reducing future profitability. This is particularly the case in the UK as the new National Living Wage is expected to lead to increasing operating costs in the coming years and the extent to which rate increases, particularly from the public sector, are likely to be achieved is uncertain. In the Bupa Chile and Quality HealthCare cash-generating units, the impairment review also requires a high level of judgement as these businesses were acquired more recently and there is a low level of headroom in the impairment calculations. The most significant judgements arise from the inherent uncertainty involved in forecasting future cash flows, the discount rate applied in calculating the present value of future cash flows and the expected terminal growth rate applied to the cash flows.

° Our response – In this area our audit procedures included challenging the cash flow forecasts and the underlying assumptions, based on our understanding of the relevant business and the sector and economic environment in which it operates. We compared forecasts to business plans and also previous forecasts to actual results to assess the performance of the business and the accuracy of forecasting. We compared the group’s assumptions to externally derived data as well as our own sector knowledge in relation to key inputs such as the projected cash flows for these cash-generating units, terminal growth rates, cost inflation and discount rates and applied sensitivities in evaluating the group’s assessments. Our own valuation specialists assisted us in evaluating the assumptions and methodologies used by the group, in particular those relating to terminal growth rates and in evaluating these assumptions with reference to valuations of similar businesses. We assessed whether the group’s disclosures over the goodwill impairment review including the disclosures regarding the sensitivity of the outcome of the impairment reviews to changes in key assumptions were appropriate.For the Care Services UK cash-generating unit, we specifically assessed the appropriateness of the assumptions that have been applied in future cash flows to take account of additional costs that are expected to be incurred following the introduction of the National Living Wage and to take account of the related fee increases that may be achieved, particularly from the public sector. For cost increases, we inspected management’s calculations of the expected additional costs arising from the National Living Wage. For fee increases, we reviewed documentation covering the fee increases that had been achieved at the start of 2016 and the status of ongoing negotiations. There is a range of assumptions that could be applied to take account of this legislative change and we therefore also assessed the valuation of the cash-generating unit that the value in use calculation implies when considering the appropriateness of the goodwill impairment that has been booked.

Valuation of properties £2,541.6m (2014: £2,586.2m)Refer to page 45 (Audit Committee Report) and Sections 3.2 and 3.3

° The risk – The group revalues its freehold, leasehold and investment properties, including care homes, hospitals and offices, primarily in the UK, Spain, Australia and New Zealand, to fair value on a periodic basis with external valuations being performed on at least a triennial basis and retirement villages in New Zealand being subject to an external valuation annually. Freehold and leasehold properties are used to perform business activities and generate revenue and profits. A full external valuation of freehold, leasehold and investment properties in Spain was performed by chartered surveyors during 2015. Directors’ valuations were performed in other businesses. The principal assumptions underpinning these valuations including operating cash flows, future profitability and competitor activity require the exercise of a high level of judgement. In particular, the valuation of care homes in the UK is subject to increased level of judgement as a result of the expected increase in operating costs arising from the implementation of the National Living Wage and the uncertainty of the extent to which fee rates will increase as a result.

° Our response – For businesses where the properties are subject to a directors’ valuation, our audit procedures included critically assessing the reasonableness of assumptions by reference to external benchmarks and forecasts, along with any reports from external chartered surveyors. For properties that were valued externally, primarily in Spain, we reviewed any external valuers’ reports and assessed the qualifications of the external valuers and the appropriateness of the assumptions applied by the external valuers. Where appropriate, we also performed detailed testing to challenge the value in use models, which are driven by assessing the operating cash flows generated by the businesses which occupy the properties. We used our own valuation specialists to assist us in challenging the key assumptions relating to operating cash flows, occupancy rates, future profitability, discount rates, market multiples and competitor activity used in the valuations. We also considered the completeness of the group’s disclosures regarding the valuation basis applied, revaluation gains and any impairment losses. For the UK care homes, similar to the goodwill assessment, we specifically assessed the appropriateness of the assumptions that have been applied to the expected cash flows over 2016-2018 to take account of additional costs that are expected to be incurred following the introduction of the National Living Wage and to take account of the related fee increases that may be achieved, particularly from the public sector. As was performed for care homes in other geographic locations, we also evaluated the future changes in the expected occupancy level of each home compared to historic experience and market forecasts as well as the expected mix between permanent and agency staff based on existing plans that are being executed by management.

Valuation of General Insurance contracts – Provisions for Claims, within Provisions under Insurance Contracts Issued £657.1m (2014: £683.1m) Refer to page 45 (Audit Committee Report) and Section 3.4

° The risk – The group’s operations include a number of general insurance entities writing health insurance policies primarily in the UK, Spain, Australia, USA and Chile. The process of recognising the provision for claims arising from general insurance contracts is an inherently complex area, requiring judgement and actuarial expertise to determine the provision. This complexity arises from the need to calculate the actuarial best estimate and the margin over best estimate using historical data which is sensitive to external inputs, such as claims cost inflation and medical trends, as well as the actuarial methodology that is applied and the assumptions on current and future experience.

° Our response – Our audit procedures included inspecting the claims reserving reports for each insurance business and evaluating and testing the key controls over the provisioning process, including controls over the completeness and accuracy of the data that supports key calculations, such as the accuracy of data in respect of current and historical claims. This data provides us with evidence over trends in claims and their costs which drive the assumptions for claims, in current and preceding financial years, which have not yet been paid at the date of the financial statements. We used our own actuarial specialists to assist us in evaluating and challenging the assumptions used by the group in each territory, as set out in the claims reserving reports, comparing them to expectations based on the group’s historical experience, current trends and our own industry

Independent Auditor’s Report to the Members of the British United Provident Association

Limited only

opinions and conclusions arising from our audit

Page 67: Longer, healthier, happier lives

65Bupa Annual Report 2015

Independent Auditor’s Report

knowledge in each territory. These assumptions include trends in the cost of claims over time, claims cost inflation and medical trends and current claims experience as well as the level of margin that is applied. For some elements of the business, we calculated our own estimate of the provision using the company’s data set for comparison against the provision calculated by the company, and considered the impact of any significant differences. We applied sensitivities to the assumptions in assessing the appropriateness and adequacy of the provisions recognised by the group. We used our industry knowledge to benchmark the group’s reserving methodologies and claims experience. We assessed whether the group’s disclosures in relation to the assumptions in respect of provisions for claims in respect of general insurance business were appropriate.

Our application of materiality and an overview of the scope of our audit The materiality for the group financial statements as a whole was set at £31 million (2014: £26 million), determined with reference to a benchmark of group profit before taxation normalised to exclude the 2015 impairment of goodwill in Care Services UK and write-down of UK care homes valuations, of £556.2 million (2014: £609.2 million) of which it represents 5.6%.We report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £1.5 million (2014 £1.3 million), in addition to other identified misstatements that warranted reporting on qualitative grounds.We subjected eight (2014: eight) of the group’s reporting components to audits for group reporting purposes. These components were located in UK, Spain, Poland, USA, Australia, New Zealand and Chile. These audits were all performed by component auditors and covered 87% (2014: 90%) of total group revenue; 93% (2014: 93%) of group profit before taxation; and 87% (2014: 87%) of total group assets. We also subjected three components (2014: two) to specified risk-focused audit procedures. These components were not individually financially significant enough to require an audit for group reporting purposes, but did present specific individual risks that needed to be addressed. These components represented 2% (2014: 1%) of total group revenue; 2% (2014: 4%) of group profit before taxation; and 3% (2014: 3%) of total group assets. In total, the components for which we performed an audit or specified risk-focused audit procedures represented 89% (2014: 91%) of total group revenue; 95% (2014: 97%) of group profit before taxation; and 90% (2014: 90%) of total group assets. For the remaining components, we performed analysis at an aggregated group level to re-examine our assessment that there were no significant risks of material misstatement within these. The segment disclosures in Section 2.0 set out the individual significance of specific countries.The group audit team instructed component auditors as to the significant areas to be covered, including the relevant risks detailed above and the information to be reported back. The group audit team approved the component materiality of £23 million (2014: £19 million), having regard to the mix of size and risk profile of the group across the components.The group audit team visited component locations in UK, Spain, Australia, Hong Kong and USA. Telephone conference meetings were also held with these component auditors and others that were not physically visited. At these visits and meetings, the findings reported to the group audit team were discussed in more detail, and any further work required by the group audit team was then performed by the component auditor.

Our opinion on other matters prescribed by the companies act 2006 and under the terms of our engagement is unmodified In addition to our audit of the financial statements, the directors have engaged us to audit the information in the Directors’ Remuneration Report that is described as having been audited, which the directors have decided to prepare as if the company were required to comply with the requirements of Schedule 8 to The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008 No. 410) made under the Companies Act 2006.In our opinion: ° the part of the Directors’ Remuneration Report which we were engaged to audit has been properly prepared in accordance with Schedule 8 to The Large 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; and

° the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements.

We have nothing to report on the disclosures of principal risksBased on the knowledge we acquired during our audit, we have nothing material to add or draw attention to in relation to:

° the directors’ statement of longer-term viability on page 30, concerning the principal risks, their management, and, based on that, the directors’ assessment and expectations of the group’s continuing in operation over the three years to 31 December 2018; or

° the disclosures in Section 1.4 of the financial statements concerning the use of the going concern basis of accounting.

We have nothing to report in respect of matters on which we are required to report by exceptionUnder ISAs (UK and Ireland) we are required to report to you if, based on the knowledge we acquired during our audit, we have identified other information in the annual report that contains a material inconsistency with either that knowledge or the financial statements, a material misstatement of fact, or that is otherwise misleading.

In particular, we are required to report to you if

° we have identified material inconsistencies between the knowledge we acquired during our audit and the directors’ statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for members to assess the group’s position and performance, business model and strategy; or

° the Audit Committee Report on pages 44 to 46 does not appropriately address matters communicated by us to the audit committee.

Under the Companies Act 2006 and under the terms of our engagement we are required to report to you if, in our opinion:

° adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or

° the parent company financial statements and the part of the Directors’ Remuneration Report which we were engaged to audit are not in agreement with the accounting records and returns; or

° certain disclosures of directors’ remuneration specified by law are not made; or

° we have not received all the information and explanations we require for our audit.

In addition to our audit of the financial statements, the directors have engaged us to review their Corporate Governance Statement as if the company were required to comply with the Listing Rules and the Disclosure Rules and Transparency Rules of the Financial Conduct Authority in relation to those matters. Under the terms of our engagement we are required to review:

° the directors’ statements, set out on pages 61 and 30, in relation to going concern and longer-term viability; and

° the part of the Corporate Governance Statement on pages 32 to 33 relating to the company’s compliance with the eleven provisions of the 2014 UK Corporate Governance Code specified for our review.

We have nothing to report in respect of the above responsibilities.

Scope of report and responsibilitiesAs explained more fully in the Directors’ Responsibilities Statement set out on page 62, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate. This report is made solely to the company’s members as a body and is subject to important explanations and disclaimers regarding our responsibilities, published on our website at www.kpmg.com/uk/auditscopeukco2014b, which are incorporated into this report as if set out in full and should be read to provide an understanding of the purpose of this report, the work we have undertaken and the basis of our opinions.

Daniel Cazeaux (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 15 Canada SquareLondonE14 5GL

2 March 2016

Page 68: Longer, healthier, happier lives

66Bupa Annual Report 2015

Primary statements

Section2015

£m2014

£m

RevenuesGross insurance premiums 2.1 7,059.0 7,091.4Premiums ceded to reinsurers 2.1 (48.6) (41.1)Net insurance premiums earned 7,010.4 7,050.3

Revenues from insurance service contracts 2.1 42.6 42.7Care, health and other revenues 2.1 2,775.4 2,684.8Total revenues 9,828.4 9,777.8

Claims and expensesInsurance claims incurred 2.2 (5,505.8) (5,544.1)Reinsurers’ share of claims incurred 2.2 37.1 29.7Net insurance claims incurred (5,468.7) (5,514.4)Share of post-taxation results of equity accounted investments 22.4 9.0Other operating expenses 2.3 (3,803.8) (3,638.5)Impairment of goodwill 3.1 (114.1) –Impairment of intangible assets arising on business combinations 3.1 – (0.7)Other income and charges 2.4 (40.6) 12.9Total claims and expenses (9,404.8) (9,131.7)

Profit before financial income and expense 423.6 646.1

Financial income and expenseFinancial income 2.5 68.7 80.8Financial expense 2.5 (118.0) (117.7)Net financial expense (49.3) (36.9)

Profit before taxation expense 374.3 609.2

Taxation expense 2.6 (96.0) (86.4)

Profit for the financial year 278.3 522.8

Attributable to:Bupa 278.3 515.7Non-controlling interests – 7.1Profit for the financial year 278.3 522.8

Sections 2 to 6 form part of these financial statements.

Consolidated Income Statement

for the year ended 31 December 2015

Page 69: Longer, healthier, happier lives

67Bupa Annual Report 2015

Primary statements

Section2015

£m2014

£m

Profit for the financial year 278.3 522.8

Other Comprehensive Income / (Expense)

Items that will not be reclassified to the Income StatementRemeasurement gains on pension schemes 3.6 16.9 171.3 Unrealised (losses) / gains on revaluation of property 3.2 (84.6) 6.5Taxation credit / (expense) on income and expenses recognised directly in other comprehensive income 2.6 19.4 (26.1)

Items that may be reclassified subsequently to the Income StatementForeign exchange translation differences on goodwill 3.1 (96.0) (52.9)Other foreign exchange translation differences (89.3) (75.2)Net gain on hedge of net investment in overseas subsidiary companies 8.5 17.5Change in fair value of underlying derivative of cash flow hedge 1.2 (2.7)Cash flow hedge on acquisition of subsidiary companies 5.4.2 – (1.5)Foreign exchange reserve on disposal of subsidiary 4.0 (4.1) (12.0) Taxation expense on income and expenses recognised directly in other comprehensive income 2.6 (0.4) (0.7)Other Comprehensive (Expense) / Income for the year, net of taxation (228.4) 24.2 Total Comprehensive Income for the year 49.9 547.0

Attributable to:Bupa 55.4 541.4 Non-controlling interests (5.5) 5.6 Total Comprehensive Income for the year 49.9 547.0

Sections 2 to 6 form part of these financial statements.

Consolidated Statement of Comprehensive Income

for the year ended 31 December 2015

Page 70: Longer, healthier, happier lives

68Bupa Annual Report 2015

Primary statements

Section2015

£m2014

£m

Non-current assetsIntangible assets 3.1 2,862.0 3,072.1 Property, plant and equipment 3.2 2,838.7 2,915.6 Investment property 3.3 270.9 242.0 Equity accounted investments 4.1 238.0 208.9 Financial investments 5.0 831.9 734.0 Derivative assets 5.2 51.3 62.1 Assets arising from insurance business 3.0.2 0.2 0.6Deferred taxation assets 3.7 2.5 2.5 Trade and other receivables 3.0.1 96.9 110.7 Restricted assets 3.0.4 45.1 40.9 Post employment benefit net assets 3.6 413.4 351.4

7,650.9 7,740.8 Current assetsFinancial investments 5.0 1,356.4 1,254.0 Derivative assets 5.2 6.0 6.9 Inventories 3.0.5 82.9 62.2 Assets arising from insurance business 3.0.2 980.5 933.6 Trade and other receivables 3.0.1 539.0 549.4 Restricted assets 3.0.4 10.8 12.3 Cash and cash equivalents 3.0.3 1,194.1 1,187.6

4,169.7 4,006.0 Total assets 11,820.6 11,746.8

Non-current liabilitiesSubordinated liabilities 5.1 (909.5) (919.7)Other interest bearing liabilities 5.1 (726.8) (1,086.9)Derivative liabilities 5.2 (10.3) (73.1)Provisions under insurance contracts issued 3.4.1 (27.6) (26.4)Post employment benefit net liabilities 3.6 (59.5) (66.1)Provisions for liabilities and charges 3.5 (27.5) (31.6)Deferred taxation liabilities 3.7 (224.1) (253.6)Other payables 3.0.6 (19.9) (16.2)

(2,005.2) (2,473.6)Current liabilitiesSubordinated liabilities 5.1 (9.9) (9.9)Other interest bearing liabilities 5.1 (427.9) (67.7)Derivative liabilities 5.2 (22.1) (3.8)Provisions under insurance contracts issued 3.4.1 (2,227.5) (2,182.5)Other liabilities under insurance contracts issued 3.4.2 (72.1) (57.6)Provisions for liabilities and charges 3.5 (69.1) (101.9)Current taxation liabilities (43.6) (48.4)Trade and other payables 3.0.6 (1,519.6) (1,333.0)

(4,391.8) (3,804.8)Total liabilities (6,397.0) (6,278.4)Net assets 5,423.6 5,468.4

EquityProperty revaluation reserve 632.3 707.9 Income and expenditure reserve and other reserves 4,797.9 4,590.7 Cash flow hedge reserve 20.8 20.0 Foreign exchange translation reserve (96.9) 71.4 Equity attributable to Bupa 5,354.1 5,390.0 Equity attributable to non-controlling interests 69.5 78.4 Total equity 5,423.6 5,468.4

Lord Leitch Evelyn Bourke Chairman Chief Financial Officer

Approved by the Board of Directors and signed on its behalf on 2 March 2016 by

Consolidated Statement of Financial Position

as at 31 December 2015

Page 71: Longer, healthier, happier lives

69Bupa Annual Report 2015

Primary statements

Section2015

£m2014

£m

Operating activitiesProfit before taxation expense 374.3 609.2

Adjustments for:Net financial expense 2.5 49.3 36.9 Depreciation, amortisation and impairment 454.7 262.0 Deferred consideration on disposal of Bupa Ireland Limited 2.4 (25.5) – Other non-cash items 13.0 (37.5)

Changes in working capital and provisions:Increase in provisions and other liabilities under insurance contracts issued 99.4 15.7 (Increase) / decrease in assets under insurance business (64.9) 14.4 Change in net pension asset / liability (51.7) (41.6)Increase in trade and other receivables, and other assets (37.4) (20.2)Increase in trade and other payables, and other liabilities 82.3 145.1 Cash generated from operations 893.5 984.0

Income taxation paid (102.7) (193.5)Increase in cash held in restricted assets 3.0.4 (2.7) (1.0)Net cash generated from operating activities 788.1 789.5

Cash flow from investing activitiesAcquisition of subsidiary companies, net of cash acquired 4.0 (156.3) (199.3)Increase in equity accounted investments 4.1 (7.5) (3.9)Disposal of subsidiary companies, net of cash disposed of 4.0 – 12.8 Deferred consideration on disposal of Bupa Ireland Limited 2.4 25.5 – Disposal of equity accounted investments 4.1 – 38.0 Purchase of intangible assets 3.1 (88.8) (84.5)Purchase of property, plant and equipment (262.6) (266.3)Proceeds from sale of property, plant and equipment 9.2 9.5 Purchase of investment property 3.3 (35.0) (41.0)Disposal of investment property 0.4 – Net proceeds from / (purchase of) financial investments, excluding deposits with credit institutions 108.8 (143.7)Net (investment into) / withdrawal from deposits with credit institutions (334.8) 257.6 Interest received 45.8 48.1 Net cash used in investing activities (695.3) (372.7)

Cash flow from financing activitiesProceeds from issue of interest bearing liabilities and drawdowns on other borrowings 102.0 379.2 Repayment of interest bearing liabilities and other borrowings (90.4) (447.4)Interest paid (112.3) (116.1)Receipts from hedging instruments 33.4 22.5 Dividends paid to non-controlling interests (3.6) (2.0)Net cash used in financing activities (70.9) (163.8)

Net increase in cash and cash equivalents 21.9 253.0 Cash and cash equivalents at beginning of year 1,187.6 939.7 Effect of exchange rate changes (15.4) (5.1)Cash and cash equivalents at end of year 3.0.3 1,194.1 1,187.6

Sections 2 to 6 form part of these financial statements.

Consolidated Statement of Cash Flows

for the year ended 31 December 2015

Page 72: Longer, healthier, happier lives

70Bupa Annual Report 2015

Primary statements

Section

Property revaluation

reserve £m

Income andexpenditure reserve and

other reserves

£m

Cash flow

hedge reserve

£m

Foreign exchange

translation reserve

£m

Total attributable

to Bupa £m

Non-controlling

interests £m

Total equity

£m

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

Other comprehensive income / (expense) Unrealised loss on revaluation of property 3.2 (84.6) – – – (84.6) – (84.6)Realised revaluation profit on disposal of property (0.2) 0.2 – – – – – Remeasurement gain on pension schemes 3.6 – 16.9 – – 16.9 – 16.9 Foreign exchange translation differences on goodwill 3.1 – – – (96.0) (96.0) – (96.0)Other foreign exchange translation differences (6.8) 0.1 – (77.1) (83.8) (5.5) (89.3)Net gain on hedge of net investment in overseas

subsidiary companies – – – 8.5 8.5 – 8.5 Change in fair value of underlying derivative of

cash flow hedge 5.4.2 – – 1.2 – 1.2 – 1.2 Foreign exchange reserve on disposal of subsidiary – (0.4) – (3.7) (4.1) – (4.1) Taxation credit / (expense) on income and expenses

recognised directly in other comprehensive income 2.6 16.0 3.4 (0.4) – 19.0 – 19.0Other comprehensive (expense) / income for the year,

net of taxation (75.6) 20.2 0.8 (168.3) (222.9) (5.5) (228.4)

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

2014At beginning of year 700.2 3,940.6 25.0 182.8 4,848.6 22.2 4,870.8 Retained profit for the financial year – 515.7 – – 515.7 7.1 522.8

Other comprehensive income / (expense) Unrealised profit on revaluation of property 3.2 6.5 – – – 6.5 – 6.5 Realised revaluation profit on disposal of property (1.9) 1.9 – – – – – Remeasurement gain on pension schemes 3.6 – 171.3 – – 171.3 – 171.3 Foreign exchange translation differences on goodwill 3.1 – – – (52.9) (52.9) – (52.9)Other foreign exchange translation differences (4.9) 1.4 – (70.2) (73.7) (1.5) (75.2)Net gain on hedge of net investment in overseas

subsidiary companies – – – 17.5 17.5 – 17.5

Cash flow hedge on acquisition of subsidiary companies 5.4.2 – – (1.5) – (1.5) – (1.5)Change in fair value of underlying derivative of

cash flow hedge – – (2.7) – (2.7) – (2.7)Foreign exchange reserve on disposal of subsidiary – (6.1) – (5.9) (12.0) – (12.0)Taxation credit / (expense) on income and expenses

recognised directly in other comprehensive income 2.6 8.0 (34.1) (0.8) 0.1 (26.8) – (26.8)Other comprehensive income / (expense) for the year,

net of taxation 7.7 134.4 (5.0) (111.4) 25.7 (1.5) 24.2

Total comprehensive income / (expense) for the year 7.7 650.1 (5.0) (111.4) 541.4 5.6 547.0 Acquisition of subsidiary companies attributable to

non-controlling interest 4.0 – – – – – 52.6 52.6 Dividends paid to non-controlling interests – – – – – (2.0) (2.0)At end of year 707.9 4,590.7 20.0 71.4 5,390.0 78.4 5,468.4

Sections 2 to 6 form part of these financial statements.

Consolidated Statement of Changes in Equity

for the year ended 31 December 2015

Page 73: Longer, healthier, happier lives

71Bupa Annual Report 2015

Notes to the Financial Statements

1.0Basis of preparation

Basis of preparation in briefThis 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 preparationThe British United Provident Association Limited (‘Bupa’ or the ‘Company’), the ultimate parent entity of the Group, is a company incorporated in England and Wales. The Company is limited by guarantee.

Both the Company financial statements and the Group’s consolidated financial statements have been prepared under International Financial Reporting Standards (IFRS) as adopted by the EU. The appropriate provisions of the Companies Act 2006 applicable to companies reporting under IFRS have also been complied with. A summary of IFRS that are relevant for the Group is included on page 134.

The financial statements were approved by the Board of Directors on 2 March 2016. The directors have reviewed and approved the Group’s accounting policies which have been applied consistently to all the years presented, unless otherwise stated. For the purposes of consolidation, the accounting policies of subsidiary companies have been aligned with those of the Parent Company.

The financial statements are prepared on a going concern basis, and under the historical cost convention, as modified by the revaluation of property, investment property, financial investments at fair value through profit or loss and derivative instruments.

1.2 Basis of consolidationThe consolidated financial statements for the year ended 31 December 2015 comprise those of the Company and its subsidiary companies (together referred to as the ‘Group’), and the share of results of equity accounted investments.

The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences to the date that control ceases. Non-controlling interests in the net assets of subsidiaries are identified separately from the Group’s equity. Non-controlling interests consist of the amount of those interests at the date of the original acquisition and the non-controlling shareholder’s share of changes in equity since this date.

Intra group related party transactions and outstanding balances are eliminated in the preparation of the consolidated financial statements of the Group.

The consolidated financial statements are presented in sterling, which is the Group’s presentation currency. The functional currency is identified at statutory entity level. These vary across the Group and include sterling, Australian dollars and euros. Each group entity then translates its results and financial position into the Group’s presentational currency, sterling, for presentation in the Group consolidated financial statements.

1.3 Accounting estimates and judgementsThe preparation of financial statements requires the use of certain accounting estimates and assumptions that affect the reported assets, liabilities, income and expenses. It also requires management to exercise judgement in applying the Group’s accounting policies.

The areas involving a higher degree of judgement or complexity, or where assumptions are significant to the consolidated financial statements, are set out below and in more detail in the related sections:

° Claims provisioning includes the estimate that is made of the expected claims payments and expense required to settle existing insurance contract obligations. Calculation of the outstanding claims provision is based on assumptions including claims development, margin of prudence, claims costs inflation, medical trends and seasonality. See section 3.4.

° Property valuations. Bupa has a significant portfolio of care home, hospital and office properties and fluctuations in the value of this portfolio can have a significant impact on the Statement of Financial Position, Income Statement and solvency position of the Group. Further detail on the revaluation process are explained in sections 3.2 and 3.3.

° Goodwill and intangible assets are recognised on business combinations with the latter valued at the date of acquisition at fair value. Goodwill and intangible assets with indefinite lives are tested for impairment on an annual basis; other intangible assets are tested for impairment if a trigger of impairment is identified. The judgemental areas within this process include the inputs within the discount rate and the forecast cash flows. See section 3.1.

° Pension assets and liabilities. The principal defined benefit scheme in the UK is The Bupa Pension Scheme. The judgemental area relates to the assumptions used in the valuation of the related pension liabilities (Section 3.6.2) performed by the independent scheme actuary.

Other judgements:

° Taxation (Section 2.6)

° Provisions (Section 3.5)

° Business combinations (Section 4.0)

° Financial Investments (Section 5.0)

1.4 Going concernManagement has conducted a detailed assessment of the Group’s going concern status based on its current position and forecast results. They have concluded that the Group has adequate resources to operate for the foreseeable future. In making this assessment, management have considered the discussions with the relationship banks as well as forecasts which take account of reasonably possible changes in trading performance, solvency capital and recently announced acquisitions.

Details of the Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Business Review on pages 1 to 30. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Financial Review on pages 22 to 25.

The group’s £800.0m bank facility was undrawn at 31 December 2015, with the exception of £6.4m of outstanding letters of credit required for general business purposes. The group has recently extended this facility from 2017 to 2020, with the option of extending this further to 2022. This further enhances the group’s short-term liquidity position.

Refer to the Longer-Term Viability Statement in the Strategic Report which considers the Group’s ability to continue in operation and meet its liabilities as they fall due, over a period of three years. In making this assumption, management have considered the discussions with the relationship banks including the review of external ratings, forecasts which take account of reasonably possible changes in trading performance, the solvency capital position and the Group’s financial and operational risk framework. It has been concluded that Bupa is a going concern and the financials have been produced on a going concern basis.

1.5 New financial reporting requirementsAll newly effective financial reporting standards applicable to the Group for the first time for the year ended 31 December 2015 have been reviewed and it has been concluded that they have no material impact on the financial statements of the Group.

Notes to the Financial Statements

for the year ended 31 December 2015

Page 74: Longer, healthier, happier lives

72Bupa Annual Report 2015

Notes to the Financial Statements

(a) IFRIC 21 LeviesIFRIC 21 provides guidance on recognition of liabilities in connection with levies imposed by government other than those levies within the scope of other standards. There has been no material impact on the financial statements as a result of the application in the year ended 31 December 2015.

(b) Amendments to the UK Companies ActFollowing the elimination of the ‘annual return option’ in section 410 of the UK Companies Act, whereby reporting entities could list only material subsidiaries in their Annual Accounts, as long as they listed all of their subsidiaries in an annual return to the Registrar of Companies, Bupa has included a full listing of all subsidiaries of the Group in the Annual Report and Accounts.

(c) Defined benefit plans: employee contributions (Amendments to IAS 19)The amendment relates to contributions from employees or third parties that are linked to service and was issued on 21 November 2013. This became effective for annual periods beginning on or after 1 July 2014. The Group has reviewed the effect of this change and there has been no material impact on the financial statements as a result of the application in the year ended 31 December 2015.

1.6 Forthcoming financial reporting requirementsThe following financial reporting standards have been issued but are not effective for the year ended 31 December 2015 and have not been early adopted by the Group.

(a) IFRS 9 financial instrumentsIFRS 9 modifies the classification and measurement of financial assets, the recognition of impairment and hedge accounting. The mandatory effective date for applying IFRS 9 is for annual periods beginning on or after 1 January 2018. The standard has not yet been endorsed by the EU and therefore is not currently available for early adoption in the EU. The impact of IFRS 9 on the financial statement is currently being evaluated by the Group.

(b) IFRS 15 Revenue recognitionIFRS 15 establishes principles that an entity can apply to report information about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer. It replaces IAS 11: Construction Contracts, IAS 18: Revenue, IFRIC 13: Customer Loyalty Programmes, IFRIC 15: Agreements for the Construction of Real Estate and IFRIC 18: Transfers of Assets from Customers.

The Group has reviewed the effect of this change and does not expect a significant impact to the financial statements. The standard will come into effect for annual periods beginning on or after 1 January 2018 and the Group is not considering early adoption therefore there is no impact on the 2015 financial statements.

(c) IFRS 16 LeasesIFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and supersedes IAS 17 Leases; IFRIC 4 Determining whether an Arrangement contains a Lease; SIC-15 Operating Leases—Incentives; and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The mandatory effective date for applying IFRS 16 is for annual periods beginning on or after 1 January 2019. The impact of IFRS 16 on the financial statement is currently being evaluated by the Group.

The Group has reviewed the effect of all other amendments to IFRS and interpretations effective for accounting periods beginning on or after 1 January 2016 and does not expect them to have a significant impact on the financial statements.

1.7 Events occurring after the reporting periodIn February 2016, the Group increased its total interest in Bupa Chile to 100%. Refer to note 4.0 (a) acquisitions for further details.

On 3 February 2016, Bupa announced the agreed sale of Bupa Home Healthcare (BHH) to Celesio, subject to regulatory approval. At 31 December 2015, BHH had net assets of £7.6m.

On 29 February 2016, UK Care No 1 Limited gave notice to repay the £235.0m secured loan notes in full on 1 April 2016 via the early redemption option granted in the documentation. UK Care No 1 Limited is fully owned by the Group, following the Group’s acquisition of 900 preference shares on 15 February 2016 for £0.9m.

Notes to the Financial Statements (continued)

for the year ended 31 December 2015

Page 75: Longer, healthier, happier lives

73Bupa Annual Report 2015

Notes to the Financial Statements

2.0Operating segments

Operating segments in briefThe Group is managed through five 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 on a basis that is consistent with the way the business is managed and reported internally.

The operating results of each Market Unit, which form the operating segments on which the information in this section has been prepared, are regularly reviewed by the Chief Executive Officer (the Group’s chief operating decision maker) to assess performance and make decisions about the allocation of resources.

The segmental underlying profit includes items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Underlying profit is based on reported profit before taxation expense, adjusted for non-underlying items to reflect trading performance.

In order to arrive at underlying profit, profit before taxation expense is adjusted for amortisation and impairment of intangible assets arising on business combinations, impairment of goodwill, net property revaluation gains and losses, realised and unrealised gains or losses on return seeking assets, realised and unrealised foreign exchange gains and losses, profit or loss on sale of businesses and fixed assets, restructuring costs and transaction costs on acquisitions and disposals.

Central expenses and net interest margin comprise income and expenses generated at the Centre, which cannot be specifically allocated to the operating segments.

Reportable segments Services and products

Australia and New Zealand

Health insurance, health assessments, health coaching and international health cover

Dental provision in Australia and New Zealand, optical care within Australia

Nursing, residential and respite care in Australia and New Zealand

Retirement villages and telecare services within New Zealand

UK Health insurance, dental services, health assessments and related products

Nursing, residential and respite care, and care villages

Management and operation of a private hospital providing medical and ancillary services to patients

Home healthcare products and services

Spain and Latin America Domestic

Health insurance and related products sold in Spain

Management and operation of hospitals, clinics and dental centres in Spain providing medical and ancillary services to patients

Provision of nursing, residential and respite care in Spain

Health insurance and operation of outpatient diagnostic clinics, hospitals and medical laboratories in Chile and clinics in Peru

International Development Markets

Domestic health insurance and related products within Hong Kong, Thailand, China, Saudi Arabia and India

Medical subscription, health insurance, diagnostics and the operation of clinics and hospitals in Poland

Diagnostics, primary healthcare and day care clinics in Hong Kong

Bupa Global International health insurance to individuals, small businesses and corporate customers in over 190 countries, as well as provision of worldwide medical assistance services

Page 76: Longer, healthier, happier lives

74Bupa Annual Report 2015

Notes to the Financial Statements

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

Australia and New Zealand UK

Spain and Latin America

Domestic

International Development

Markets Bupa Global Total

2015 £m

2014 £m

2015 £m

2014 £m

2015 £m

2014 £m

2015 £m

2014 £m

2015 £m

2014 £m

2015 £m

2014 £m

(i) RevenuesTotal revenues for

reportable segments 3,648.4 3,759.6 2,858.1 2,711.6 1,824.5 1,842.5 551.6 506.8 947.5 958.7 9,830.1 9,779.2 Inter segment income – – (0.3) (0.4) – – (0.5) (0.1) – – (0.8) (0.5)External revenues for

reportable segments 3,648.4 3,759.6 2,857.8 2,711.2 1,824.5 1,842.5 551.1 506.7 947.5 958.7 9,829.3 9,778.7

Net reclassifications to other expenses or financial income and expense (0.9) (0.9)

Consolidated total revenues 9,828.4 9,777.8

(ii) Segment resultUnderlying profits for

reportable segments1 279.5 309.2 182.6 175.0 70.1 130.6 43.1 17.1 103.9 97.9 679.2 729.8 Central expenses and net

interest margin (96.7) (92.0)Consolidated underlying profit

before taxation 582.5 637.8

Non-underlying items:Amortisation of intangible

assets arising on business combinations (13.0) (14.1) (4.6) (4.6) (7.1) (7.1) (18.0) (20.8) (3.8) (4.9) (46.5) (51.5)

Impairment of goodwill – – (114.1) – – – – – – – (114.1) –

Impairment of intangible assets arising on business combinations – – – – – (0.7) – – – – – (0.7)

Impairment of investment in associate – – – – – – (0.7) – – – (0.7) –

Restructuring costs – (0.2) – (3.7) – – (1.1) (2.1) – (8.5) (1.1) (14.5)Transaction costs on

acquisitions and disposals (0.6) (0.7) (1.6) (0.6) – (3.3) (1.5) (0.8) – – (3.7) (5.4)Realised and unrealised foreign

exchange gains / (losses) 0.2 0.4 (0.1) (0.1) (2.0) (2.1) 0.2 0.1 (8.8) 8.8 (10.5) 7.1 Net property revaluation

gains / (losses)2 2.3 10.7 (67.7) (9.9) 3.7 (1.5) – – – – (61.7) (0.7)Net (losses) / gains on disposal

of fixed assets (1.1) (0.5) (0.4) (0.4) 1.4 (0.7) (0.1) – (0.4) (0.2) (0.6) (1.8)Net gains / (losses) on disposal

of businesses – – – 10.9 (0.4) – 0.3 16.2 – – (0.1) 27.1 Gains on return-seeking assets,

net of hedging 7.0 13.8 Deferred consideration in

relation to sale of Bupa Ireland Limited 25.5 –

Other3 (1.7) (2.0)(208.2) (28.6)

Consolidated profit before taxation expense 374.3 609.2

1 Underlying profit for reportable segments includes share of post-taxation results of equity accounted investments. International Development Markets includes Bupa Arabia and Max Bupa; Bupa Global includes Highway to Health. For further information refer to section 4.1.

2 Includes property and equipment write-down in Care Services UK of £67.8m, of which £8.7m is equipment. See section 3.2.3 Includes central non-underlying items including £1.7m of foreign exchange losses in 2015.

Notes to the Financial Statements (continued)

for the year ended 31 December 2015

Page 77: Longer, healthier, happier lives

75Bupa Annual Report 2015

Notes to the Financial Statements

(iii) Other informationAmortisation and depreciation

costs for reportable segments 52.5 53.8 106.9 101.3 53.1 51.3 33.6 36.3 17.4 18.7 263.5 261.4 Non-cash (expense) / income

for reportable segments (166.4) (134.9) (35.8) (78.3) (74.4) (123.1) (10.0) (2.1) 19.2 (39.3) (267.4) (377.7)Unallocated non-cash

(expense) / income (31.2) 3.0Total non-cash expenses (298.6) (374.7)

(iv) Geographic informationAustralasia UK Spain Rest of the World Total

2015 £m

2014 £m

2015 £m

2014 £m

2015 £m

2014 £m

2015 £m

2014 £m

2015 £m

2014 £m

Consolidated total revenues 3,648.4 3,759.6 3,378.8 3,241.1 1,168.2 1,311.2 1,633.0 1,465.9 9,828.4 9,777.8 Consolidated non-current

assets1 2,720.0 2,749.0 1,600.1 1,896.1 444.5 458.8 1,593.2 1,507.5 6,357.8 6,611.4

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

2.1Revenues

Revenues in briefThe 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 premiumsGross insurance premiums represent the premiums earned relating to risk exposure for the reported financial year. They comprise gross premiums written, adjusted for the change in the provision for unearned premiums for premiums written relating to periods of risk in subsequent financial years.

Premiums are shown gross of commissions payable and net of insurance premium taxes that may apply in certain jurisdictions.

Premiums ceded to reinsurersPremiums 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.

Insurance service contracts

Contracts entered into by the Group’s general insurance entities that do not result in the transfer of significant insurance risk to the Group are accounted for as insurance service contracts. These contracts mainly relate to the administration of claims funds on behalf of corporate customers. Revenues from service contracts are recognised as the services are provided.

Some of these contracts contain financial liabilities representing deposits repayable to the customer. These are measured at amortised cost. The claims fund deposit held on behalf of customers is reported within other payables, accruals and deferred income as appropriate.

Care, health, dental and other

The Group generates income from fees receivable from the operation of its care homes, hospitals, dental centres and other healthcare and wellbeing centres. Revenues from service contracts are recognised as the services are provided.

Service concession receivablesThe Group also operates two public hospitals in Spain under separate service concession arrangements granted by the local governments (the grantors). Revenue is recognised from the construction of infrastructure and for operation of the hospitals. Construction revenues are recognised in line with the stage of completion of the work performed. Operational revenues are recognised in the period in which the services are provided, in line with the service concession arrangements. The accounting policy for the service concession receivables is explained in Section 3.0.1.

Page 78: Longer, healthier, happier lives

76Bupa Annual Report 2015

Notes to the Financial Statements

Total revenues2015

£m2014

£m

Gross premiums written 7,139.3 7,120.9Change in gross provision for unearned premiums (80.3) (29.5)Gross insurance premiums 7,059.0 7,091.4

Gross premiums written ceded to reinsurers (50.3) (42.9)Reinsurers’ share of change in gross provision for unearned premiums 1.7 1.8Premiums ceded to reinsurers (48.6) (41.1) Net insurance premiums earned 7,010.4 7,050.3

Revenues from insurance service contracts 42.6 42.7Care, health and other revenues 2,775.4 2,684.8Total revenues 9,828.4 9,777.8

2.2Insurance claims

Insurance claims in briefInsurance 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 claimsInsurance claims incurred comprise insurance claims paid during the year together with related handling costs, the movement in the gross provision for claims in the period and the Risk Equalisation Trust Fund levy for Australian health insurance businesses. See Section 3.4 for details of the claims provision.

In Australia, the Risk Equalisation Trust Fund charges a levy to all registered private health insurers and then allocates a proportion of the cost of eligible claims between all fund participants.

Reinsurers’ share of claims incurredReinsurers’ share of claims incurred represents recoveries from reinsurers on claims paid, adjusted for the reinsurers’ share of the change in the gross provision for claims.

See ‘Assets arising from insurance business’ within Section 3.0.2 for the related balance sheet item and detail of impairments.

Net insurance claims incurred2015

£m2014

£m

Insurance claims paid 5,593.8 5,657.3Change in gross provisions for claims (0.5) (35.4)

5,593.3 5,621.9Risk Equalisation Trust Fund levy (net of recoveries) (87.5) (77.8)Insurance claims incurred 5,505.8 5,544.1

Recoveries from reinsurers on claims paid (36.1) (30.2)Reinsurers’ share of change in gross provisions for claims (1.0) 0.5Reinsurers’ share of claims incurred (37.1) (29.7) Net insurance claims incurred 5,468.7 5,514.4

Notes to the Financial Statements (continued)

for the year ended 31 December 2015

Page 79: Longer, healthier, happier lives

77Bupa Annual Report 2015

Notes to the Financial Statements

2.3Other operating expenses

Other operating expenses in briefOther 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 claims.

Operating expenses exclude insurance claims, finance costs and taxation.

Other operating expenses2015

£m20141

£m

Staff costs 2.3.1 1,712.0 1,621.5 Acquisition costs 2.3.2 226.0 205.9 Medical supplies and fees 822.1 730.1 Property costs 165.9 161.7 Operating lease rentals 126.5 131.8 Marketing costs 110.2 119.7 Catering and housekeeping costs 68.1 68.7 Physician costs 56.5 56.1 Consultancy fees 47.3 38.2 Net loss / (gain) on foreign exchange transactions 15.0 (5.4)Amortisation of intangible assets 3.1 116.0 119.6 Depreciation expense 3.2 147.5 141.7 Other operating expenses (including auditor’s remuneration) 2.3.3 190.7 248.9Total other operating expenses 3,803.8 3,638.5

1 The table above has been re-presented with the cost of sales previously included having been reallocated to the following accounts: ° Staff costs ° Medical supplies and fees ° Marketing costs

° Catering and housekeeping costs ° Other operating expenses

2.3.1 Staff cost and employee numbersStaff costsThe below table represents the total employee benefit expenses incurred by the Group during the period.

2015 £m

2014 £m

Wages and salaries 1,653.7 1,562.0 Social security costs 114.3 112.1 Contributions to defined

contribution schemes 29.6 29.3 Other pension costs 5.6 11.5 Total staff costs 1,803.2 1,714.9 Staff costs relating to claims

handling reported in claims (91.2) (93.4)Staff costs in operating expenses 1,712.0 1,621.5

Directors’ Remuneration Report is described in pages 51 to 60 of this report.

Employee numbersThe average number of full time equivalent employees, including Executive Directors, employed by the Group during the year was:

Average employee numbers 2015 2014

Australia and New Zealand 12,006 11,002 UK 27,333 26,569 Spain and Latin America Domestic 16,237 16,392 International Development Markets 6,590 6,323 Bupa Global 1,567 1,553 Centre 285 252 Total employee numbers 64,018 62,091

The total employee headcount as at 31 December 2015 was 83,635 (2014: 78,917).

2.3.2 Acquisition costs2015

£m2014

£m

Commission for direct insurance 214.4 204.7 Other acquisition costs paid 14.6 12.3 Changes in deferred acquisition costs (3.0) (11.1)Total acquisition costs 226.0 205.9

The movement in deferred acquisition costs is detailed in section 3.0.2.

2.3.3 Auditor’s remuneration2015

£m2014

£m

Fees payable to the Company’s auditor for the audit of the Company’s annual accounts 0.8 0.7

Fees payable to the Company’s auditor and its associates for: – the audit of the Company’s subsidiaries

pursuant to legislation 3.9 4.0 – audit-related assurance services 0.7 0.7

Total audit fees payable to the Company’s auditors, KPMG LLP and its associates 5.4 5.4

Fees payable to other auditors:Audit of overseas subsidiary companies 0.2 0.1

Total audit fees 5.6 5.5 Fees payable to the Company’s auditor and its

associates for other services: Tax compliance services 0.3 0.3 Tax advisory services 0.1 0.1

Corporate finance services 1.0 0.6 All other non-audit services 1.5 1.4

Total non-audit fees 2.9 2.4 Total auditor’s remuneration 8.5 7.9

In addition, fees in respect of the audit of The Bupa Pension Scheme were £49,000 (2014: £42,000).

Page 80: Longer, healthier, happier lives

78Bupa Annual Report 2015

Notes to the Financial Statements

2.4Other income and charges

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

Other income and charges2015

£m2014

£m

Net gain on disposal of businesses1 4.0.b 25.4 27.1 Net loss on sale of equity accounted investments 4.1 – (0.7)Movement in investment in associates provision (0.7) –Surplus / (deficit) on revaluation of property 3.2 3.6 (1.8)Write-down of property 3.2 (68.2) (9.9)Net loss on disposal of property, plant and equipment (0.7) (1.8)Total other income and charges (40.6) 12.9

1 Includes deferred consideration on 2007 disposal of Bupa Ireland Limited received in 2015 of £25.5m. Property revaluations and write-downs are explained in Section 3.2.

2.5Financial income

and expense

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

Financial incomeInterest income, except in relation to assets classified at fair value through profit or loss, is recognised in the Income Statement as it accrues, using the effective interest method.

Interest income is calculated using the effective interest method. Any mark to market movements are split between realised or unrealised.

Changes in the value of financial assets designated as at fair value through profit or loss are recognised within financial income as an unrealised gain or loss while the asset is held. Upon realisation of these assets, the change in fair value since the last valuation is recognised within financial income as a realised gain or loss.

2015 £m

2014 £m

Interest income: Loans and receivables 40.8 46.6Investments held to maturity 2.6 2.5Investments designated at fair value

through profit or loss 1.7 3.5Net realised gains on financial investments

designated at fair value through profit or loss 13.6 8.3

Net (decrease) / increase in fair value:Investments designated at fair value

through profit or loss (4.4) 9.1Investment property 3.3 11.6 10.9

Net foreign exchange gains / (losses) 2.8 (0.1)Total financial income 68.7 80.8

Included within financial income are net gains, net of hedging, on the Group’s return seeking asset portfolio of £7.0m (2014: net gain of £13.8m).

Financial expenseInterest payable on borrowings is calculated using the effective interest method.

2015 £m

2014 £m

Interest expense on financial liabilities at amortised cost 114.3 113.6

Finance charges in respect of finance leases 1.2 1.3Other financial expenses 2.5 2.8Total financial expenses 118.0 117.7

Notes to the Financial Statements (continued)

for the year ended 31 December 2015

Page 81: Longer, healthier, happier lives

79Bupa Annual Report 2015

Notes to the Financial Statements

2.6Taxation expense

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

The taxation expense on the profit for the year comprises of current and deferred taxation. Income taxation is recognised in the Income Statement except to the extent that it relates to items recognised directly in Other Comprehensive Income, in which case it is recognised directly in the Statement of Other Comprehensive Income.

(i) Recognised in the Income Statement2015

£m2014

£m

Current taxation expenseUK taxation on income for the year 20.8 31.6Adjustments in respect of prior periods (18.8) (71.0)

2.0 (39.4)Double taxation relief (2.5) (3.3)

Foreign taxation on income for the year 109.0 137.7Adjustments in respect of prior periods (8.8) 1.0

100.2 138.7 Total current taxation 99.7 96.0

Deferred taxation (income) / expenseOrigination and reversal of temporary

differences (11.1) (15.9)Adjustments in respect of prior periods – 6.6Changes in taxation rates 7.4 (0.3)

Total deferred taxation (3.7) (9.6)Taxation expense 96.0 86.4

Current taxation is the expected taxation payable on the taxable profit for the year, using taxation rates enacted or substantively enacted at the balance sheet date, and any adjustments to taxation payable in respect of previous years.

The Group is subject to taxation audits in the territories in which it operates and considers each issue on its merits when deciding whether to hold a provision against the potential taxation liability that may arise. However the amount that is ultimately paid could differ from the amount initially recorded and this difference is recognised in the period in which such a determination is made.

(ii) Reconciliation of effective taxation rate2015

£m2014

£m

Profit before taxation expense 374.3 609.2Taxation at the domestic UK corporation

taxation rate of 20.25% (2014: 21.5%) 75.8 130.9

Effect of:Different taxation rates in foreign jurisdictions 25.8 28.4Non-deductible expenses 17.0 (10.7)Current income taxation adjustments

in respect of prior periods (27.6) (70.0)Deferred taxation adjustments

in respect of prior periods – 6.6Changes in taxation rate 7.4 (0.3)Movement on deferred taxation

asset not recognised (2.3) 1.5Group relief not paid for (0.1)Taxation expense at the effective

rate of 25.6% (2014: 14.2%) 96.0 86.4

(iii) Current and deferred taxation recognised directly in Other Comprehensive Income2015 2014

Before taxation

£m

Taxation benefit /

(expense) £m

Net of taxation

£m

Before taxation

£m

Taxation benefit /

(expense) £m

Net of taxation

£m

Current taxation (charge) / credit in respect of:Foreign exchange translation differences on goodwill (96.0) – (96.0) (52.9) – (52.9)Other foreign exchange translation differences (89.3) – (89.3) (75.2) 0.1 (75.1)Net gain on hedge of net investment in overseas subsidiary companies 8.5 – 8.5 17.5 – 17.5Cash flow hedge on acquisition of subsidiary company – – – (1.5) – (1.5)Deferred taxation (charge) / credit in respect of:Unrealised (loss) / profit on revaluation of property (84.6) 16.0 (68.6) 6.5 8.0 14.5Remeasurement gain on pension schemes 16.9 3.4 20.3 171.3 (34.1) 137.2Change in fair value of underlying derivative of cash flow hedge 1.2 (0.4) 0.8 (2.7) (0.8) (3.5)Foreign exchange reserve on disposal of subsidiary (4.1) – (4.1) (12.0) – (12.0)Taxation (charge) / credit on income and expenses recognised directly

in Other Comprehensive Income (247.4) 19.0 (228.4) 51.0 (26.8) 24.2

Page 82: Longer, healthier, happier lives

80Bupa Annual Report 2015

Notes to the Financial StatementsNotes to the Financial

Statements (continued)

for the year ended 31 December 2015

3.0Working capital

Working capital in briefWorking capital represents the assets and liabilities the Group generates through its trading activity. The Group therefore defines working capital as trade and other receivables, assets and liabilities arising from insurance business, inventory, cash and trade and other payables.

3.0.1 Trade and other receivablesCurrent trade and other receivables are carried at amortised cost less impairment losses. Non-current trade and other receivables are carried at present value based on discounted cash flows.

2015 £m

2014 £m

Non-currentService concession receivables (a) 77.7 88.5 Other receivables 6.8 8.9 Prepayments 8.1 8.6Investment receivables and

accrued investment income 4.3 4.7 Total non-current other receivables 96.9 110.7

CurrentTrade receivables

– net of impairment losses (b) 256.2 242.5 Service concession receivables (a) 107.4 150.5 Other receivables 86.4 72.0 Prepayments 62.2 57.1 Accrued income 26.4 26.8 Investment receivables and

accrued investment income 0.4 0.5 Total current trade and other

receivables 539.0 549.4

Total trade and other receivables 635.9 660.1

The above balance is stated net of provisions for impairment losses. Information regarding the ageing of trade and other receivables is shown in Section 5.4.3.

The fair value of non-current investment receivables and accrued investment income is £4.0m (2014: £4.4m). The carrying value of the other non-current receivable balances are a reasonable approximation of the fair value.

(a) Service concession receivables The Group has recognised two service concession receivables in respect of the public-private partnership arrangement with the Valencian and Madrid Governments (the grantors). Under the arrangement with the Valencian Government, the Sanitas business was contracted to build and operate the Manises hospital for the grantor for 15 years. Under the current arrangement with the Madrid Government, the Sanitas business was contracted to operate the Torrejón hospital for the grantor for 30 years.

A financial asset has been recognised for each arrangement to the extent that the Group has an unconditional contractual right to receive cash from, or at the direction of, the grantors for the services provided per capita head of the population covered. The service concession receivables are carried at amortised cost less impairment losses, and relates to construction revenues which are recognised in line with the stage of completion of the work performed and are included in place of the related asset, as at the end of the contract the ownership of the hospitals reverts to the grantors. The receivable also relates to operational revenues which are recognised in the period in which the services are provided, in line with the service concession arrangements. Under IFRIC 12, revenue is recognised based on the average operating margin for the life of the contract. 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 performance to date in line with the revised margin.

The financial asset has been impaired by £52m due to the impact on our business case projections of customers from within our catchment area seeking treatment at other facilities, accentuated by the introduction of the Free Choice Act in Valencia in the year.

(b) Impairment of financial assetsFinancial assets comprise trade and other receivables and financial investments. Refer to Section 5.0 for financial investments.

If they are not held at fair value, financial assets are assessed at each reporting date to determine whether there is any objective evidence that they are impaired. A financial asset is considered impaired if objective evidence indicates that one or more events that have occurred since the initial recognition of the asset have had a negative impact on the estimated future cash flows of that asset.

An impairment loss in respect of a financial investment measured at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the effective interest rate at the date the investment was made.

Significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics.

All impairment losses are recognised in the Income Statement. Impairment losses on trade receivables amounting to £4.7m (2014: £1.0m) have been charged to other operating expenses.

3.0.2 Assets arising from insurance businessFinancial assets arising from insurance business, excluding reinsurers' share of insurance provisions, are held at amortised cost less impairment losses. The valuation of reinsurance debtors is discussed in section 3.4.

2015 £m

2014 £m

Non-currentDeferred acquisition costs (a) 0.2 0.6Total non-current assets arising from

insurance business 0.2 0.6

CurrentInsurance debtors (b) 799.8 736.9Reinsurers’ share of insurance provisions (c) 4.8 15.8Deferred acquisition costs (a) 87.8 84.0Medicare rebate (d) 67.3 77.2Risk Equalisation Trust Fund recoveries 20.8 19.7Total current assets arising from

insurance business 980.5 933.6

Total assets arising from insurance business 980.7 934.2

The above balance is stated net of provision for impairment losses. Information regarding the ageing of insurance debtors, Medicare rebate and Risk Equalisation Trust Fund recoveries is shown in Section 5.4.3.

Page 83: Longer, healthier, happier lives

81Bupa Annual Report 2015

Notes to the Financial Statements

(a) Deferred acquisition costs Acquisition costs represent commissions payable and other expenses related to the acquisition of insurance contract revenues written during the financial year. Acquisition costs that have been paid that relate to subsequent periods are deferred and recognised in the Income Statement in the relevant period on a straight line basis.

The movement in deferred acquisition costs is as follows:

2015 £m

2014 £m

At beginning of year 84.6 73.8Acquisition costs deferred 288.0 309.4Acquisition costs released to Income

Statement (285.0) (298.3)Foreign exchange 0.4 (0.3)At end of year 88.0 84.6

(b) Insurance debtorsImpairment releases in respect of insurance debtors amounting to £2.2m (2014: £1.2m) have been recognised in other operating expenses in the Income Statement, detailed in Section 2.3.

(c) Reinsurers’ share of insurance provisions The recoverables due from reinsurers are shown within assets arising from insurance business and are assessed for impairment at each balance sheet date. Impairments are accounted for within the Income Statement on an incurred loss basis.

Reinsurers’ share of insurance provisions are further analysed in Section 3.4.

(d) Medicare rebateIn Australia, the Government provides a rebate to health insurers in respect of the premiums paid for private health insurance. Rebates due from the Government but not received at the balance sheet date are recognised in assets arising from insurance business.

3.0.3 Cash and cash equivalentsCash 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.

Bank overdrafts £nil (2014: £nil) that are repayable on demand and form an integral part of the Group’s capital management (see Section 5.3) are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.

2015 £m

2014 £m

Cash at bank and in hand 684.2 650.0Short-term deposits 509.9 537.6Cash and cash equivalents 1,194.1 1,187.6

3.0.4 Restricted assetsRestricted 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.

2015 £m

2014 £m

Non-current restricted assets 45.1 40.9Current restricted assets 10.8 12.3Total restricted assets 55.9 53.2

The non-current restricted assets balance of £45.1m (2014: £40.9m) consists of cash deposits held to secure a charge over the non-registered pension arrangement maturing after 2022 (see Section 6.0). Included in current restricted assets is £2.1m (2014: £2.5m) in respect of claims funds held on behalf of corporate customers.

3.0.5 InventoriesInventories are stated at the lower of cost and net realisable value. Cost is determined using the first-in-first-out method, or methods that approximate this and includes costs incurred in acquiring the inventories and in bringing them to their current location and condition.

Inventories relating to drugs, prostheses, consumables and housing stock were £82.9m (2014: £62.2m).

Inventory write downs of £0.1m (2014: £0.2m) were made during the year. The Group consumed £496.8m (2014: £463.5m) of inventories, which are recognised within other operating expenses in the Income Statement.

3.0.6 Trade and other payablesTrade and other payables (excluding deferred income) are carried at amortised cost.

2015 £m

2014 £m

Non-currentAccruals 8.5 9.6 Other payables 10.3 5.4 Deferred income (a) 1.1 1.2 Total non-current other payables 19.9 16.2

CurrentAccruals 416.3 418.6 Accommodation bond liabilities (b) 369.6 313.9 Trade payables 261.8 246.3 Other payables (c) 354.0 241.7 Deferred income (a) 75.3 66.4 Social security and other taxes 42.6 46.1 Total current trade and other payables 1,519.6 1,333.0 Total trade and other payables 1,539.5 1,349.2

The fair value of other payables and accruals are £363.5m (2014: £246.6m) and £424.6m (2014: £428.0m) respectively. The carrying value of the other trade and other payables is a reasonable approximation of the fair value. Information regarding the ageing of trade payables, other payables, accommodation bond liabilities and accruals is shown in Section 5.4.4.

(a) Deferred incomeIn respect of the Group’s revenue and deferred revenue for performance based health service contracts, estimates are made by the Group based on the most recent performance evaluation data available at the year end and these estimates are utilised if they are determined to be reliable. Reliable estimates can only be made on an individual contract basis once the results of an initial performance evaluation are available, and revenue is deferred until the first reliable evaluation is available.

Where the results of the final performance assessment differ from the estimation or if an updated reliable estimate is available, the difference is recognised in the period in which such determination is made. Where reliable estimates are not available, the Group recognises revenue only to the extent of the contract costs recognised that the Group believes are recoverable.

(b) Accommodation bond liabilities Accommodation bonds are non-interest bearing deposits paid by some residents of care homes held in Bupa Care Services 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.

(c) Other payablesIncluded within other payables is £91.1m in relation to the mandatory offer to market for the remaining 26.3% of Bupa Chile shares which are external to Bupa.

Page 84: Longer, healthier, happier lives

82Bupa Annual Report 2015

Notes to the Financial StatementsNotes to the Financial

Statements (continued)

for the year ended 31 December 2015

3.1Intangible assets

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

GoodwillGoodwill represents the excess of the cost of a business combination over the fair value of the Group’s share of identifiable assets, liabilities and contingent liabilities of the acquired subsidiary company or associated company at the date of business combination. The carrying value of goodwill may be adjusted up to 12 months from the date of acquisition, as the allocation of the purchase price to identifiable intangible assets is finalised within that period. Goodwill arising on business combinations is capitalised and presented as part of intangible assets in the Consolidated Statement of Financial Position.

Goodwill is stated at cost less accumulated impairment losses. Impairment reviews are performed annually or more frequently if there is an indication that the carrying value may be impaired. Impairment reviews are performed at the level of the relevant cash generating unit (CGU). A CGU is the smallest identifiable group of assets generating cash inflows and outflows measured for goodwill. Where the fair value of net assets acquired is greater than the consideration paid, the excess is recognised immediately in the Income Statement.

Other intangible assetsIntangible assets, other than goodwill, that are acquired as part of a business combination are capitalised at fair value. Intangible assets acquired separately are stated at cost less accumulated amortisation and impairment.

Amortisation is charged to the Income Statement on a straight line basis as follows:

° Computer software 2 to 7 years

° Brand and trademarks 10 to indefinite

° Technology and databases 10 years

° Distribution networks 10 to 11 years

° Customer relationships 4 to 15 years

° Present value of acquired in-force business 20 years

° Customer contracts 4 to 6 years

° Order backlogs 1 year

° Licences to operate care homes term of licence

° Leases term of lease

Intangible assets that are subject to amortisation are reviewed for impairment if circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised in the Income Statement to reduce the carrying amount to the recoverable amount.

Bed licences held by the Group have been attributed an indefinite useful life due to the fact that these licences, which are issued by the Australian Government, have no expiry date. Assets with an indefinite useful life are subject to annual impairment reviews.

Page 85: Longer, healthier, happier lives

83Bupa Annual Report 2015

Notes to the Financial Statements

Intangible assets

Goodwill £m

Computer software

£m

Brands / Trademarks

£m

Customer relation-

ships £m

Other £m

Total £m

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

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

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

2014CostAt beginning of year 2,587.6 618.0 173.7 483.8 262.0 4,125.1Assets arising on business combinations 188.9 13.7 156.4 37.7 – 396.7Additions – 67.8 0.5 3.2 13.0 84.5Disposals of subsidiary companies (307.8) (97.5) (12.0) (44.4) – (461.7)Disposals – (6.6) – – – (6.6)Other – 3.4 – – – 3.4Foreign exchange (52.2) (5.9) (5.3) (8.0) (6.5) (77.9)At end of year 2,416.5 592.9 313.3 472.3 268.5 4,063.5

Amortisation and impairment lossAt beginning of year 595.5 416.5 77.8 166.9 85.7 1,342.4Amortisation for year – 67.7 7.6 33.3 11.0 119.6Impairment loss – – – – 0.7 0.7Disposals of subsidiary companies (307.8) (94.8) (12.0) (44.4) – (459.0)Disposals – (6.2) – – – (6.2)Other – 1.9 – – – 1.9Foreign exchange 0.7 (2.6) (1.4) (2.3) (2.4) (8.0)At end of year 288.4 382.5 72.0 153.5 95.0 991.4

Net book value at end of year 2,128.1 210.4 241.3 318.8 173.5 3,072.1Net book value at beginning of year 1,992.1 201.5 95.9 316.9 176.3 2,782.7

Page 86: Longer, healthier, happier lives

84Bupa Annual Report 2015

Notes to the Financial StatementsNotes to the Financial

Statements (continued)

for the year ended 31 December 2015

Intangible assets of £2,862.0m (2014: £3,072.1m) includes £668.5m (2014: £733.6m) which is attributable to other intangible assets arising on business combinations (included within Customer relationships, brands/trademarks and other) as follows:

2015 £m

2014 £m

Customer relationships 284.0 318.8Bed licences

(within Bupa Care Services Australia) 102.7 103.3Brand and trademarks 220.1 241.5Licences to operate care homes 34.6 38.4Customer contracts 6.8 10.2Leases 10.7 11.3Distribution networks 8.5 9.0Present valuation of acquired in-force business 1.1 1.1Total 668.5 733.6

Impairment testing of intangible assetsIntangible assets with indefinite useful lives are tested at least annually for impairment by comparing the net carrying value with the recoverable amount using value in use calculations. In arriving at the value in use for each cash generating unit (CGU), key assumptions have been made regarding future projected cash flows, discount rates and terminal growth rates. The main assumptions upon which the cash flow projections are based include premiums and claims costs for our health insurance businesses, fee rate, cost of care and occupancy for our care services businesses and revenue growth and gross margins for hospitals and clinics. These valuation techniques are classified within level 3 of the IFRS 13 fair value hierarchy.

Aside from those mentioned below, cash flow projections have been based on management operating profit projections for a three year period which have been approved by the Board. Cash flow projections for Bupa Care Services UK, Quality HealthCare and Bupa Chile are based on five years with LUX MED and Bupa Care Services New Zealand based on periods of eight and ten years respectively. As the business model requires investment beyond a three-year period to reach a steady state of operations, a longer period was utilised as an appropriate timescale over which to look at the annual cash flow projections given the nature of the business.

Taxation has been applied to the pre-taxation management operating profits based on the statutory taxation rates in the country of operation.

Future pre-taxation cash flows have been discounted at pre-taxation discount rates. Discount rates used for the value in use calculations for each of the Group’s CGUs are based on considerations of the specific risks associated with the business plans of each CGU, as well as external factors. These include the market assessment of the time value of money and the risks inherent in the relevant country where the cash flows are generated.

Cash flow projections beyond the forecast periods have been extrapolated by applying a terminal growth rate between 2.5% and 3.7% (2014: 2.0% and 3.0%) for all CGUs. The terminal growth rates represent an estimate of the long-term growth rate for each of the CGUs, taking into account 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 industry.

The following table summarises the pre-taxation discount rates used for impairment testing for the main CGUs:

2015 %

2014 %

Bupa Australia Health Insurance 9.6 9.7Bupa Aged Care Australia 9.0 8.2Bupa Health Services Australia 11.5 12.4Bupa Care Services New Zealand 8.8 8.7Bupa Care Services UK 8.2 8.6Bupa Cromwell Hospital 9.6 9.9Bupa Chile 12.8 11.6Sanitas Seguros 11.3 11.3LUX MED 10.5 9.6Quality HealthCare 10.4 9.6Bupa Global 11.0 10.0

Impairment of goodwillAt 31 December 2015, the recoverable amount of each of the CGUs was tested in respect of the carrying amount. Due to ongoing funding pressures experienced by local authorities and the impending introduction of the National Living Wage in the UK from April 2016, there has been a write down in the value of our Care Services UK business, comprising of a partial impairment of goodwill of £114.1m and a write down in the value of property and equipment of £179.7m, of which £67.8m has been recognised in the Income Statement (refer to note 3.2). The key valuation assumptions used to test the carrying value of goodwill included a pre-taxation discount rate of 8.2% and a terminal growth rate of 2.5%.

The recoverable amount of the remaining CGUs is determined to be higher than their respective carrying amounts, resulting in no impairment to goodwill. No impairments to goodwill arose in the prior year.

The following table summarises goodwill by CGU as at 31 December:

2015 £m

2014 £m

Australia and New Zealand

Bupa Australia Health Insurance 785.7 832.2

Bupa Aged Care Australia 239.8 253.9

Bupa Health Services Australia 252.5 244.6

Bupa Care Services New Zealand 31.5 34.0

UK

Bupa Care Services UK 84.0 190.8

Bupa Cromwell Hospital 16.2 16.2

Other 23.9 17.0

Spain and Latin America Domestic

Bupa Chile 142.4 157.2

Sanitas Seguros 29.0 28.6

Other 5.2 5.5

International Development Markets

LUX MED 196.0 182.2

Quality HealthCare 103.8 98.1

Bupa Global 67.8 67.8Total 1,977.8 2,128.1

Page 87: Longer, healthier, happier lives

85Bupa Annual Report 2015

Notes to the Financial Statements

Sensitivity to changes in key assumptionsA sensitivity analysis has been performed on the key assumptions used to determine the value in use for each CGU as at 31 December 2015.

Other than as disclosed below, management believes that no reasonably probable change in any of the key assumptions would cause the carrying value of any goodwill or intangible asset with an indefinite useful life to exceed its recoverable amount.

It is possible that a change in key assumptions could cause the impairment of goodwill for Bupa Care Services New Zealand, LUX MED, Quality HealthCare and Bupa Chile. The table below shows the decrease required in the terminal growth rate or increase required in discount rate for the recoverable amount of the CGU to equal the carrying amount. These CGUs are also particularly sensitive to changes in projected cashflows.

Headroom £m

Terminal growth rate

%

Decrease in terminal

growth rate %

Increase in discount

rate %

Bupa Care Services New Zealand 22.0 2.8 0.3 0.2

LUX MED 30.1 3.0 0.6 0.4Quality HealthCare 17.8 3.5 0.5 0.4Bupa Chile 25.5 3.7 0.4 0.3

Impairment of other intangible assetsAt 31 December 2015, the recoverable amounts of other intangible assets with indefinite useful lives were tested in respect of their carrying amounts, resulting in no impairments. Intangible assets that are subject to amortisation were reviewed and no indicators of impairment were identified.

During the year, there have been no impairments of intangible assets. In the prior year an impairment of £0.7m was recognised in relation to licenses to operate Spanish care homes due to lower projected average care home fees.

3.2Property, plant and equipment

Property, plant and equipment in briefProperty, 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.

EquipmentEquipment (including leasehold improvements) is stated at historical cost less subsequent depreciation and impairment losses.

DepreciationFreehold land and assets under construction, included within freehold or leasehold properties as appropriate, are not depreciated. Depreciation on other items of property, plant and equipment is calculated using the straight line method to allocate cost or revalued amount less residual value over estimated useful lives, as follows:

° Freehold buildings 50 years

° Leasehold buildings shorter of useful life and lease term

° Equipment shorter of useful life (leasehold improvements) and lease term

° Equipment 3 to 10 years

Impairment Impairment reviews are undertaken where there are indications that the carrying value of an asset may not be recoverable. An impairment loss on assets carried at cost is recognised in other income and charges to reduce the carrying value to the recoverable amount. An impairment loss on assets carried at the revalued amount is recognised in the revaluation reserve, except where an asset is revalued below historical cost, in which case the loss is recognised in the Income Statement within other income and charges.

Leased assetsLeases are classified as finance leases when the terms of the lease substantially transfer all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

Assets obtained under finance leases are capitalised within property, plant and equipment at fair value at acquisition.

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 payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Finance lease liabilities, net of finance charges in respect of future periods, are included within other interest bearing liabilities (see Section 5.1). The interest element of the obligation is allocated over the lease term to reflect a constant rate of interest on the outstanding obligation.

Leasehold land, where no option to obtain title exists, is treated as an operating lease. Assets classified as being under operating lease are not capitalised and therefore not recognised within the balance sheet (Section 6.1). Payments made under operating leases are recognised as prepayments within trade and other receivables within Section 3.0.1 and are recognised in the Income Statement on a straight line basis over the term of the lease within other operating expenses (section 2.3).

The amounts included in property, plant and equipment in respect of equipment held under finance leases is £0.1m (2014: £0.3m).

Page 88: Longer, healthier, happier lives

86Bupa Annual Report 2015

Notes to the Financial StatementsNotes to the Financial

Statements (continued)

for the year ended 31 December 2015

Property, plant and equipment

Freehold property

£m

Leasehold property

£mEquipment

£mTotal

£m

2015Cost or valuationAt beginning of year 2,250.9 202.0 986.3 3,439.2Additions through business combinations 27.8 – 19.1 46.9Additions 129.3 12.3 132.1 273.7Disposals (10.3) (5.5) (71.5) (87.3)Revaluations (162.1) (14.1) – (176.2)Other 17.3 22.4 (35.8) 3.9Foreign exchange (64.9) (2.9) (23.6) (91.4)At end of year 2,188.0 214.2 1,006.6 3,408.8

Depreciation and impairment lossAt beginning of year 58.4 50.3 414.9 523.6Depreciation charge for year 33.5 13.4 100.6 147.5Disposals (3.5) (4.6) (69.7) (77.8)Revaluations (33.8) (4.4) – (38.2)Impairments 11.2 – 8.9 20.1Other (1.6) – 1.3 (0.3)Foreign exchange 1.2 11.4 (17.4) (4.8)At end of year 65.4 66.1 438.6 570.1

Net book value at end of year 2,122.6 148.1 568.0 2,838.7Net book value at beginning of year 2,192.5 151.7 571.4 2,915.6

2014Cost or valuationAt beginning of year 2,108.9 184.2 888.2 3,181.3 Additions through business combinations 49.2 – 90.6 139.8 Additions 120.2 27.0 138.4 285.6 Disposals (6.5) (11.0) (83.2) (100.7)Disposal of subsidiaries – – (25.5) (25.5)Revaluations 15.3 (0.1) – 15.2 Other (6.0) 3.1 0.8 (2.1)Foreign exchange (30.2) (1.2) (23.0) (54.4)At end of year 2,250.9 202.0 986.3 3,439.2

Depreciation and impairment lossAt beginning of year 8.6 43.4 432.2 484.2 Depreciation charge for year 31.8 13.6 96.3 141.7 Disposals (0.2) (10.2) (79.4) (89.8)Disposal of subsidiaries – – (23.7) (23.7)Revaluations 19.7 0.7 – 20.4Other (0.7) 2.6 (1.8) 0.1Foreign exchange (0.8) 0.2 (8.7) (9.3)At end of year 58.4 50.3 414.9 523.6

Net book value at end of year 2,192.5 151.7 571.4 2,915.6 Net book value at beginning of year 2,100.3 140.8 456.0 2,697.1

Page 89: Longer, healthier, happier lives

87Bupa Annual Report 2015

Notes to the Financial Statements

Freehold and leasehold properties Freehold and leasehold properties are comprised of care homes, care villages, clinics, hospitals and offices. These properties are shown at fair value based on periodic valuations performed by external independent valuers, less subsequent depreciation and impairment losses. Borrowing costs relating to the acquisition or construction of qualifying assets are capitalised as part of the cost of that asset.

Revaluation of propertiesValuations are performed with sufficient regularity to ensure that the carrying value does not differ significantly from fair value at the balance sheet date. The revaluation of UK offices and all properties in Spain carried out in 2015 was performed independently by Knight

Frank Chartered Surveyors. Revaluations were effective as of 31 December in the year in which they were undertaken. Directors’ valuations were performed in the year where it was identified that carrying value differed significantly from fair value.

Care homes and hospitals are valued with regard to their trading potential based on value in use techniques, the principal assumptions are: quantifying a fair, maintainable level of trade and profitability; levels of competition; and assumed ability to renew existing licences, consents, certificates or permits.

At each revaluation date, accumulated depreciation is eliminated against the gross carrying amount of the asset.

The significant assumptions used in the calculation of the fair values of the material level three freehold and leasehold properties in the Group are:

Freehold and Leasehold Property AustraliaNew

Zealand UK SpainAverage occupancy rate 95.5% 92.1% 87.3% 94.5%

Average capitalisation rate 15.1% 14.7% 13.1% 16.7%

Level twoUKAll UK properties apart from those held by Bupa Care Services UK are classified as level two with fair values being determined by an external valuer based on market values of similar properties.

Spain and Latin AmericaRegional offices and clinics in Spain are valued by external valuers based on market value and these are classified as level two.

Bupa Chile properties are valued based on replacement cost and market comparables which are observable inputs and therefore these properties are classified as level two.

Level threeUK, Australia, SpainProperties within Bupa Care Services UK, Australian buildings, and Spanish hospitals and care homes are all are classified as level three. Their valuations are determined based on a capitalisation of earnings approach. A multiple is applied to each facility’s earnings in order to project the financial performance of the facility to determine its value in use. The multiple applied for each facility is set based on qualitative and quantitative indicators of the facility’s current and future performance and assumes normal prudent management of the facility. For properties within Bupa Care Services UK and Spanish hospitals and care homes, unobservable inputs include the forecasted occupancy rate and the average capitalisation rate. For Australian buildings unobservable inputs include occupancy levels, trends in earnings, land values and rental yields in the surrounding area. For Spanish hospitals and care homes unobservable inputs include the forecasted occupancy rate and the average capitalisation rate.

New ZealandIn the New Zealand business, all property is classified as level three. Unobservable inputs include average occupancy and average weekly fees and the average capitalisation rate.

International Development Markets (IDM)Properties within IDM are classified as level three, with fair values being determined using reliable estimates of future cash flows. Unobservable inputs used include occupancy rates, average rental rates and discount rates.

Sensitivity analysisThe sensitivity analysis below considers the impact on the year end valuation of level three properties, and are based on a change in assumption while holding all other assumptions constant. In practice, this is unlikely to occur and changes in assumptions may be correlated.

Australia 0.5% increase 0.5% decrease

Average occupancy rate £1.8m increase £1.8m decrease

Average capitalisation rate £11.7m decrease £12.5m increase

New Zealand 0.5% increase 0.5% decrease

Average occupancy rate £1.9m increase £1.9m decrease

Average capitalisation rate £5.0m decrease £5.3m increase

UK 0.5% increase 0.5% decrease

Average occupancy rate £21.2m increase £21.2m decrease

Average capitalisation rate £5.6m decrease £5.6m increase

Spain 0.5% increase 0.5% decrease

Average occupancy rate £0.4m increase £0.4m decrease

Average capitalisation rate £0.7m decrease £0.7m increase

The table below sets out the reconciliation of the opening and closing balances for property classified as level three fair value measurement as at 31 December 2015.

Freeholdproperty

£m

Leaseholdproperty

£m

At 1 January 2015 2,096.0 129.2Additions 125.1 11.7Disposals (0.3) (0.8)Revaluation and write down through the

Income Statement (61.6) (3.0)Revaluation and write down through Other

Comprehensive Income (77.2) (7.4)

Depreciation (30.3) (11.4)

Other 3.1 (2.6)

Foreign exchange (55.3) (2.2)

At 31 December 2015 1,999.5 113.5

Page 90: Longer, healthier, happier lives

88Bupa Annual Report 2015

Notes to the Financial StatementsNotes to the Financial

Statements (continued)

for the year ended 31 December 2015

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

Freeholdproperty

£m

Leaseholdproperty

£m

Valuation – December 2015 210.4 22.0Valuation – December 2014 179.6 60.2Valuation – December 2013 1,716.6 66.3Assets currently held at cost 81.4 65.7Cost or valuation 2,188.0 214.2

Gains and losses on revaluation are recognised in the property revaluation reserve, except where an asset is revalued below historical cost, in which case the deficit is recognised in the Income Statement. Where a revaluation reverses the losses taken to the Income Statement in prior years, the credit is recognised in the Income Statement.

A £36.5m revaluation gain (2014: £6.5m) and £121.1m write down (2014: £nil) have been recognised in the property revaluation reserve.

In 2015, a revaluation surplus of £3.6m (2014 deficit: £1.8m) and write down of £68.2m (2014: £9.9m) were charged to the Income Statement (see section 2.4).

The entire net £33.0m revaluation surplus (2014: £17.1m) was based on a valuation by external valuers.

During 2015, following an assessment of the ongoing funding pressures and impending introduction of the National Living Wage in the UK from April 2016, a write down of freehold property and equipment of £179.7m (2014: £22.3m) arose in connection with the directors’ valuation of the UK Care Home portfolio.

Recognised in the carrying amount of freehold property is £113.0m (2014: £69.9m) in relation to freehold property in the course of construction.

Certain property, plant and equipment is held as securitised assets under borrowing arrangements described in Section 5.1.

Historical cost of the Group’s revalued assets2015

£m2014

£m

Historical cost of revalued assets 2,081.3 1,955.4 Accumulated depreciation based

on historical cost (296.6) (283.2)Historical cost net book value 1,784.7 1,672.2 Depreciation charge for the year

on historical cost 41.6 39.1

The historical cost of all property, plant and equipment is £3,087.2m (2014: £2,941.8m).

Page 91: Longer, healthier, happier lives

89Bupa Annual Report 2015

Notes to the Financial Statements

3.3Investment properties

Investment properties in briefInvestment properties are physical assets that are not occupied by the Group and are leased to third parties to generate rental income.

Most of 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, on a basis appropriate to the purpose for which the property is intended and with regard to recent market transactions for similar properties in the same location.

In an active market, the portfolio is valued annually by an independent valuer, holding a recognised and relevant professional qualification, and with recent experience in the location and category of investment property being valued.

In New Zealand, the retirement village market is fragmented. Growth in new developments is also restricted due to a lack of suitable sites. As a result, no active market exists for the retirement villages from which values can be derived. These properties are valued using discounted cash flow projections based on reliable estimates of future cash flows.

Any gain or loss arising from a change in the fair value is recognised in the Income Statement within financial income and expenses.

(i) Investment properties2015

£m2014

£m

At 1 January 2015 242.0 184.2Additions through business combinations – 4.6Additions 35.0 41.0Disposals (0.4) –Increase in fair value 11.6 10.9Reclassifications to Property, Plant and

Equipment (1.0) 0.7Foreign exchange (16.3) 0.6At 31 December 2015 270.9 242.0

The historical cost of investment properties is £173.9m (2014: £148.9m).

Of the £270.9m (2014: £242.0m) of investment properties in the balance sheet as at 31 December 2015, £6.2m (2014: £7.9m) was either valued based on active market prices by external valuers, Knight Frank, Chartered Surveyors or acquired in the prior year. These properties are categorised as level two within the fair value hierarchy.

The remaining carrying value of investment properties of £264.7m (2014: £234.1m), primarily consisting of the Group’s portfolio of retirement villages, 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.

Significant assumptions used in the valuation include:

Australia and New Zealand

Discount rate 9.0%Capital growth rate 2.4%Provision for capital replacement 0.4%Vacancy period 3 monthsTurnover in apartments and villas 4–7 years

The following table sets out the reconciliation of the opening and closing balances for investment properties classified as level three fair value measurements as at 31 December 2015.

Total £m

At 1 January 2015 234.1Additions 35.0Unrealised gains recognised in financial income 11.5Foreign exchange (15.9)At 31 December 2015 264.7

The sensitivity analysis below considers the impact on the year end valuation of level three investment properties and is based on a change in assumption while holding all other assumptions constant. In practice, this is unlikely to occur and changes in assumptions may be correlated.

Australia and New Zealand 0.5% increase 0.5% decrease

Discount rate £5.8m decrease £6.8m increaseCapital growth rate £16.8m increase £14.4m decrease

(ii) Leases as lessorInvestment properties include commercial properties which are leased to third parties. The leases contain an initial non-cancellable period of between one and three years. Subsequent renewals are negotiated with the lessee.

The Group leases out its investment properties under operating leases. The future lease receipts under non-cancellable leases are as follows:

2015 £m

2014 £m

Less than one year 0.2 0.2Between one and five years 1.0 0.9More than five years 0.8 1.1Total 2.0 2.2

During the year ended 31 December 2015, the Group’s retirement village portfolio generated £9.8m (2014: £8.7m) of income which was recognised as revenue in the Income Statement. Total direct operating expenses of these retirement villages amounted to £6.6m (2014: £5.9m), £0.3m (2014: £0.3m) was recognised as rental income in the Income Statement for other investment properties held by the Group. Direct operating expenses of these properties amounted to £0.1m (2014: £0.1m).

Page 92: Longer, healthier, happier lives

90Bupa Annual Report 2015

Notes to the Financial StatementsNotes to the Financial

Statements (continued)

for the year ended 31 December 2015

3.4Provisions and other

liabilities under insurance contracts issued

Provisions and other liabilities under Insurance contracts issued in briefThe provisions and other liabilities under insurance contracts issued arise from the Group’s underwriting activities.

The provisions mainly relate to unearned premiums, which are deferred revenues that relate to future periods; and claims, where an estimate is made of the expense required to settle existing insurance contract obligations. The other liabilities primarily consist of deposits and commissions payable.

3.4.1 Provisions under insurance contracts issuedUnearned premiumsThe unearned premium provision represents premiums written that relate to periods of risk in future accounting periods. It is calculated on a straight line basis, which is not materially different from a calculation based on the pattern of incidence of risk.

Provision for claimsThe gross provision for claims represents the estimated liability arising from claims episodes in current and preceding financial years which have not yet given rise to claims paid. The provision includes an allowance for claims management and handling expenses.

The gross provision for claims is estimated based on current information, and the ultimate liability may vary as a result of subsequent information and events.

Adjustments to the amount of claims provision for prior years are included in the Income Statement in the financial year in which the change is made. In setting the provisions for claims outstanding, a best estimate is determined on an undiscounted basis and then a margin of prudence is added such that there is confidence that future claims will be met from the provisions. The level of prudence set is either one required by regulation or one that provides an appropriate degree of confidence.

A provision is made for unexpired risks where the claims and administrative expenses are likely to arise after the end of the financial year, in respect of contracts commencing before that date, are expected to exceed the related unearned premiums, less related deferred acquisition costs. The methods used and estimates made for claims provisions are reviewed regularly.

2015 2014

Gross £m

Re- insurance

£mNet £m

Gross £m

Re- insurance

£mNet £m

General insurance businessProvisions for unearned premiums 1,570.4 (3.0) 1,567.4 1,499.4 (9.2) 1,490.2 Provisions for claims 657.1 (0.9) 656.2 683.1 (5.7) 677.4

Long-term businessProvisions for life insurance benefits 27.6 (0.9) 26.7 26.4 (0.9) 25.5 Total insurance provisions 2,255.1 (4.8) 2,250.3 2,208.9 (15.8) 2,193.1

Non-current 27.6 – 27.6 26.4 – 26.4

Current 2,227.5 (4.8) 2,222.7 2,182.5 (15.8) 2,166.7Total insurance provisions 2,255.1 (4.8) 2,250.3 2,208.9 (15.8) 2,193.1

(a) Analysis of movements in provisions for unearned premiumsAt beginning of year 1,499.4 (9.3) 1,490.1 1,488.8 (7.7) 1,481.1 Premiums deferred 7,136.4 (48.6) 7,087.8 7,118.0 (41.2) 7,076.8 Deferred premiums released to income (7,051.8) 47.0 (7,004.8) (7,088.5) 39.4 (7,049.1)Transfers (7.6) 7.6 – – – –Foreign exchange (6.0) 0.3 (5.7) (18.9) 0.3 (18.6)At end of year 1,570.4 (3.0) 1,567.4 1,499.4 (9.2) 1,490.2

(b) Analysis of movements in provisions for claimsAt beginning of year 683.1 (5.7) 677.4 684.7 (6.2) 678.5 Additions through business combinations – – – 44.7 – 44.7 Cash paid to settle claims (5,505.1) 35.4 (5,469.7) (5,462.6) 29.6 (5,433.0)Decrease for prior years’ claims (4.8) (0.2) (5.0) (17.0) 0.1 (16.9)Increase for current year claims 5,596.2 (36.2) 5,560.0 5,521.5 (29.2) 5,492.3 Risk Equalisation Trust Fund levy (87.5) – (87.5) (77.8) – (77.8)Transfers (5.8) 5.8 – – – –Foreign exchange (19.0) – (19.0) (10.4) – (10.4)At end of year 657.1 (0.9) 656.2 683.1 (5.7) 677.4

Page 93: Longer, healthier, happier lives

91Bupa Annual Report 2015

Notes to the Financial Statements

Assumptions for general insurance businessThe process of recognising liabilities arising from general insurance entails the estimation of future payments to settle incurred claims and associated claims handling expenses, as well as assessing whether additional provisions for unexpired risk are required. The principal assumptions in the estimation of the liability relate to the expected frequency, severity and settlement patterns of insurance claims, which are expected to be consistent with recently observed experience and trends. The aim of claims reserving is to select assumptions and reserving methods that will produce the best estimate of the future cash outflows for the subject claims; it is an uncertain process which also requires judgements to be made. The resulting provisions for outstanding claims incorporate a margin for adverse deviation, over and above the best estimate liability, the quantum of which reflects the level of this uncertainty.

Claims development patterns are analysed in each of the Group’s insurance entities; where distinct sub-portfolios with different claims cost and development characteristics exist, further analysis is undertaken to derive assumptions for reserving that are appropriate and can be applied to relatively homogeneous groups of policies. Such sub-portfolios may be defined by product line, risk profile, geography or market sector. Various established reserving methods for general insurance are considered, typically basic chain ladder, Bornhuetter-Ferguson and pure risk cost methods. Additional consideration is given to the treatment of large claims, claim seasonality, claims inflation and currency effects, for which appropriate adjustments to assumptions and methods are made.

While there is some diversity in the development profile of health insurance claims across the Group, such claims are generally highly predictable in both frequency and average amount, and claims are settled quickly following medical event for which benefit is claimed. Medical expenses claims are typically, substantially fully-settled within just a few months. Claims management practices such as pre-authorisation of the claim with the insurer, electronic claims settlement and effective network provider arrangements can reduce the development period to four to six months.

Insurance provisions are inevitably estimates. Actual experience of claims costs and/or administrative expenses may well vary from that anticipated in the reserving estimates.

The following table shows the sensitivities to such variation:

Increase in claims

Increase in expenses

2015Change in variable % 5.0 10.0Reduction in profit net of

reinsurance before taxation £m 61.1 15.4

2014Change in variable % 5.0 10.0Reduction in profit net of

reinsurance before taxation £m 58.4 16.3

These variances would reduce the amount of profit that would otherwise emerge in subsequent periods. Since premium provisions include profit margins and claims provisions include prudence margins, variance from expectations can be absorbed by these margins.

Bupa’s long-term insurance business does not form a core part of its operations.

Liability adequacy testsLiability adequacy tests are performed for Bupa’s insurance portfolios. For short duration contracts, a premium deficiency is recognised if the sum of expected costs of future claims and claim adjustment expenses, capitalised deferred acquisition costs, and maintenance expenses exceeds the corresponding unearned premiums while considering anticipated investment income. Such a deficiency would be immediately recognised in the Income Statement.

3.4.2 Other liabilities under insurance contracts issuedOther liabilities under insurance contracts issued consists of payables to insurance creditors other than policyholders.

2015 £m

2014 £m

Reinsurers’ deposits 2.6 2.1Reinsurance payables 18.9 17.9Commissions payable 12.2 8.7Other insurance payables 38.4 28.9Total other liabilities under insurance

contracts issued 72.1 57.6

Page 94: Longer, healthier, happier lives

92Bupa Annual Report 2015

Notes to the Financial StatementsNotes to the Financial

Statements (continued)

for the year ended 31 December 2015

3.5Provisions for liabilities

and charges

Provisions for liabilities and charges in briefA 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 obligation, where an expectation has been set by the Group. A provision is made where an outflow of resources is probable and where the payments can be reliably estimated. If the effect is material, provisions are determined by discounting the estimated future payments at a pre-taxation rate that reflects current market

assessments of the time value of money and, where appropriate, the risks specific to the liability.

Although provisions are made where payments can be reliably estimated, the amounts provided are based upon a number of assumptions which are inherently uncertain and therefore the amount that is ultimately paid could differ from the amount recorded.

Provisions for liabilities and charges

Long service and

annual leave

£m

Deferredconsider-

ation£m

Customer remediation

and legal provisions

£m

Insurance provisions

£m

Unoccupied property

£m

Regulatory provisions

£mOther

£mTotal

£m

At beginning of year 47.4 33.1 4.4 14.0 4.6 5.0 25.0 133.5

Acquisitions through business combinations 0.2 4.0 – – – – – 4.2 Charge for year 33.5 4.7 0.6 7.9 – 2.8 2.5 52.0 Released in year – (5.2) (1.2) – (1.8) (2.7) (14.7) (25.6)Utilised in year (31.1) (12.0) (1.4) (12.3) – (1.4) (4.0) (62.2)Foreign exchange (2.7) (1.8) (0.1) – – – (0.7) (5.3)At end of year 47.3 22.8 2.3 9.6 2.8 3.7 8.1 96.6

Non-current 12.9 5.8 – 4.6 2.3 – 1.9 27.5 Current 34.4 17.0 2.3 5.0 0.5 3.7 6.2 69.1 Total provisions for liabilities and charges 47.3 22.8 2.3 9.6 2.8 3.7 8.1 96.6

Long service and annual leaveThe long service leave provision relates to territories where employees are legally entitled to substantial paid leave after completing a certain length of qualifying service. Uncertainty around both the amount and timing of future outflows arises as a result of variations in employee retention rates, which may vary based on historical experience. The annual leave provision relates to territories where the annual entitlement of leave is not required to be taken within a predetermined time nor does it expire. Therefore uncertainty exists around the timing of future outflows as well as around the amount of future outflows due to wage inflation.

Deferred considerationDeferred consideration is largely related to deferred consideration of AU$90m (2015: £11.4m) arising from the purchase of Dental Corporation Ltd (Australia) on 31 May 2013. This balance is reviewed at each reporting period and any fair value adjustments are recorded in the Income Statement. Within Dental Corporation there is further deferred consideration of £9.3m for the earn-out payable to practice principals on the acquisition of dental practices.

Customer remediation and legal provisionsCustomer remediation provisions relate to the costs of compensating customers for losses or damages associated with a failure to comply with regulations or to treat customers fairly. Legal provisions relate to potential and ongoing legal claims and represent the discounted fair value of the total estimated liabilities. Due to the nature of these provisions, the timing and potential cost is uncertain.

Insurance provisions The insurance provision is in respect of the Group’s self insurance and covers the excess that arises on claims made in relation to losses arising from damage to property, business interruption and medical, employee or public liability. Any outflows relating to this provision are dependent on the frequency and value of claims submitted as well as the excess amount specified within individual policies with insurers. The fund is actuarially assessed twice a year to ensure that the provision is adequate.

Unoccupied propertyIn prior years, the Group entered into non-cancellable leases for property which it no longer fully occupies. The Group has provided for lease obligations, net of sub-lease receivables. The lease obligations are payable monthly, quarterly or annually, within a range of one to 13 years, the average being five years. The future net outflows are uncertain and are affected by the Group’s ability to sub-let unoccupied property.

Regulatory provisionsRegulatory provisions relate to levies payable to customer protection bodies by the Group’s various regulated entities. Such levies are generally determined on a capped percentage of revenues basis. Payments are normally made annually, although the frequency may be increased or decreased at the discretion of the customer protection bodies.

OtherOther provisions include amounts relating to payments under legislation and restructuring costs.

Page 95: Longer, healthier, happier lives

93Bupa Annual Report 2015

Notes to the Financial Statements

3.6Post employment

benefits

Post employment benefits in briefThe Group operates several funded defined benefit and defined contribution pension schemes for the benefit of employees and directors, in addition to an unfunded (non-registered) and post retirement medical benefit scheme.

The main defined benefit scheme is The Bupa Pension Scheme which was closed to new entrants from 1 October 2002.

The principal defined contribution pension scheme is The Bupa Retirement Savings Plan.

The National Employment Savings Trust (NEST) has been used to meet the Group’s automatic enrolment duties for UK employees.

Defined contribution pension schemesThe defined contribution pension schemes provide employees with a retirement fund accumulated through investment of contributions made by Bupa and the employees. Members of the scheme use their funds to secure benefits at retirement. Benefits are not known in advance and the investment and longevity risks are assumed solely by the members of the scheme. Contributions payable by the relevant sponsoring employers are defined in the scheme rules or plan specifications and these contributions are recognised as an expense in the Income Statement as incurred.

Defined benefit post employment schemesThe defined benefit pension schemes provide benefits based on final pensionable salary. The Group’s net obligation in respect of defined benefit pension 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 scheme assets. The discount rate used is the yield at the balance sheet date on high quality corporate bonds denominated in the currency in 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 future refunds from the scheme or reductions in future contributions to the scheme.

The charge to the Income Statement for defined benefit schemes represents the following: current service cost calculated on the projected unit credit method, net interest cost, past service costs and administrative expenses.

All remeasurements are recognised in full in the Statement of Comprehensive Income in the period in which they occur.

(i) Amounts recognised in the Consolidated Income StatementThe amounts charged / (credited) to other operating expenses for the year are:

2015£m

2014£m

Current service cost 10.2 14.1Gains on curtailments (0.4) (0.5)Net Interest on defined benefit liability / asset (10.7) (3.8)Administrative expenses 2.0 1.7Total amount charged to Consolidated

Income Statement 1.1 11.5

The charge to other operating expenses in respect of cash contributions to defined contribution schemes is £29.2m (2014: £29.2m).

(ii) Amounts recognised directly in Other Comprehensive Income The amounts charged / (credited) directly to Equity:

2015£m

2014£m

Actual return less expected return on assets 44.5 (273.1)(Gain) / Loss arising from changes to financial

assumptions (45.1) 127.0Gain arising from changes to experience

assumptions (19.5) (9.3)Loss / (Gain) arising from changes to

demographic assumptions 3.2 (15.9)Total remeasurement gains credited directly

to Equity (16.9) (171.3)

The cumulative amount of remeasurement losses recognised directly in Equity is £10.5m (2014: £27.4m).

3.6.1 Group post employment benefit schemesDefined contribution pension schemesThe principal defined contribution pension plan in the UK is the Bupa Retirement Savings Plan. This scheme was opened with effect from 1 October 2002 and is available to permanent employees of The British United Provident Association Limited and Bupa Insurance Services Limited to join on a voluntary basis. There are several other contract based defined contribution arrangements available to employees of other employers within the Group to join on a voluntary joining basis. The Group automatically enrols any eligible non-pensioned employees into the National Employment Savings Trust (NEST).

Defined benefit post employment schemesThe principal defined benefit scheme in the UK is The Bupa Pension Scheme. Contributions by employees and by Group companies are paid into separate funds administered by a corporate Trustee. The scheme was closed to new entrants from 1 October 2002, but its existing members continue to accrue pension entitlements.

Contributions by Group companies to this scheme are made in accordance with the recommendations of the independent scheme actuary.

The independent scheme actuary for The Bupa Pension Scheme performs detailed triennial valuations together with annual interim reviews. Both triennial and interim valuations use the attained age method, recognising the closure of the scheme to new entrants.

At the most recent triennial valuation, as at 1 July 2014 the scheme’s independent actuary recommended payment of employer contributions at the rate of 24.8%. In addition to these employer contributions a payment equivalent to the employee contribution of 7% of pensionable salaries is paid as part of the Group’s salary sacrifice arrangement (known as PeopleChoice Pensions). There is a corresponding reduction in members’ wages and salaries as a result.

The expected contributions payable in 2016, with regards to the accumulation of future benefits, are £47.5m in respect of The Bupa Pension Scheme and £5.7m in respect of PeopleChoice Pensions.

Page 96: Longer, healthier, happier lives

94Bupa Annual Report 2015

Notes to the Financial StatementsNotes to the Financial

Statements (continued)

for the year ended 31 December 2015

There are several other smaller defined benefit pension schemes operated by UK and overseas subsidiaries. The defined benefit pension schemes are assessed by independent scheme actuaries in accordance with UK or local practice and under IAS 19 as at 31 December 2015 for the purposes of inclusion in the Group’s consolidated financial statements. Complete disclosure of these other defined benefit pension schemes is not practicable within this report but they are disclosed within the financial statements of the relevant sponsoring employer of each scheme.

Unfunded schemes Unfunded defined benefit pension arrangements exist for certain employees and former employees to provide benefits in addition to the funded pension arrangements provided by the Group. There are no separate funds or assets in the Statement of Financial Position to support the unfunded schemes; however, provisions are included in the Statement of Financial Position in respect of these liabilities and assets are ring-fenced to support these liabilities.

The latest valuation of these arrangements was performed as at 31 December 2015 under IAS 19 by the Group’s independent actuary. The charge to the Consolidated Income Statement in respect of these arrangements and the assessment of the related pension liability as at 31 December 2015 have been made in accordance with this latest valuation, which used the same principal assumptions as adopted at 31 December 2015 under IAS 19 for The Bupa Pension Scheme.

Post retirement medical benefit schemeThe Group also provides unfunded post retirement medical benefits for certain former employees. These benefits were granted under an agreement which closed to new entrants in 1992. The latest valuation of this scheme was carried out as at 31 December 2015 by an actuary employed by the Group using the same key assumptions as adopted at 31 December 2015 under IAS 19 for The Bupa Pension Scheme.

(iii) Assets and liabilities of schemes

Pension schemesPost retirement medical

benefit scheme Total

Note2015

£m2014

£m2015

£m2014

£m2015

£m2014

£m

Present value of funded obligations (iv) (1,356.3) (1,388.6) – – (1,356.3) (1,388.6)Fair value of scheme assets (v) 1,761.5 1,728.5 – – 1,761.5 1,728.5Net assets of funded schemes 405.2 339.9 – – 405.2 339.9

Present value of unfunded obligations (iv) (42.8) (43.2) (8.5) (11.4) (51.3) (54.6)Net recognised assets / (liabilities) 362.4 296.7 (8.5) (11.4) 353.9 285.3

Represented on the statement of financial positionNet liabilities (59.5) (66.1)Net assets 413.4 351.4Net recognised assets 353.9 285.3

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

Pension schemesPost retirement medical

benefit scheme Total

2015£m

2014 £m

2015£m

2014£m

2015£m

2014£m

At beginning of year 1,431.8 1,290.1 11.4 11.0 1,443.2 1,301.1Current service cost 10.2 14.1 – – 10.2 14.1Interest on obligations 53.0 59.3 0.4 0.5 53.4 59.8Contributions by employees 0.6 0.6 – – 0.6 0.6(Gain) / loss arising from changes to financial assumptions (45.1) 127.0 – – (45.1) 127.0Loss arising from changes to experience assumptions (19.5) (9.3) – – (19.5) (9.3)Loss / (gain) arising from changes to demographic assumptions 6.0 (16.2) (2.8) 0.3 3.2 (15.9)

Benefits paid (36.6) (32.8) (0.5) (0.4) (37.1) (33.2)Gains on curtailment (0.4) (0.5) – – (0.4) (0.5)Foreign exchange (0.9) (0.5) – – (0.9) (0.5)At end of year 1,399.1 1,431.8 8.5 11.4 1,407.6 1,443.2

Page 97: Longer, healthier, happier lives

95Bupa Annual Report 2015

Notes to the Financial Statements

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

2015£m

2014£m

At beginning of year 1,728.5 1,373.6Interest income 64.2 63.6

Return on assets excluding interest income (44.5) 273.1Contributions by employer 49.7 51.3Contributions by employees 0.6 0.6Administration expenses (2.1) (1.7)Benefits paid (33.9) (31.4)Foreign exchange (1.0) (0.6)At end of year 1,761.5 1,728.5

The market values of the assets of the funded schemes’ are as follows:2015

£m2014

£m

Debt instruments 587.7 –Gilts 524.6 764.6Corporate bonds 462.3 337.3Cash / other assets 89.0 351.6Equities 65.8 245.4Diversified growth funds 24.0 23.9Government bonds 6.5 3.5Property 1.6 2.2Total market value of the assets of the funded schemes 1,761.5 1,728.5

All assets have a quoted market price.

3.6.2 Actuarial assumptions The responsibility for setting the assumptions underlying the IAS 19 valuations rests with the directors, having first taken advice from an independent actuary.

The key weighted average financial assumptions used when valuing the obligations of the post-employment benefit schemes under IAS 19 for smaller schemes are as follows:

Funded schemes

Unfunded schemes

Note2015

%2014

%2015

%2014

%

Inflation rate (a) 3.1 3.1 3.2 3.1 Rate of increase in salaries (a) 3.7 3.6 3.7 3.6 Rate of increase to pensions in payment (a) 3.0 2.9 3.1 3.0 Rate of increase to pensions in deferment (a) 2.2 2.1 2.2 2.1 Discount rate for scheme assets and obligations (a) 3.9 3.7 3.9 3.7 Medical cost trend rate (b) – – 4.0 4.0

(a) Actuarial assumptions underlying the valuation of obligationsThe inflation assumption is set by reference to the difference between the yield on long-term fixed interest gilts and the real yield on index-linked gilts, with a deduction of 0.2% to reflect an inflation risk premium. The rate of increase of pensions in payment is the same as the inflation rate, with the exception of benefits which receive fixed increases in payment as defined under the respective scheme rules.

The rate of increase in salaries is equal to the long-term expected annual average salary pay increase for the employees who are members of the respective schemes. This assumption is set relative to the inflation 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.

(b) Medical cost trend rate The medical cost trend rate is the assumed additional escalation of medical costs over and above the assumed inflation rate. It is assumed that such an effect will continue during the remaining run-off of the liability. Assumed medical cost trend rates have an impact on the amounts recognised in the Consolidated Income Statement. A one percentage point change in assumed medical cost trend rates would result in the following increase and decrease in the post retirement medical benefit obligation.

Page 98: Longer, healthier, happier lives

96Bupa Annual Report 2015

Notes to the Financial StatementsNotes to the Financial

Statements (continued)

for the year ended 31 December 2015

One % point

increase 2015

One % point

decrease 2015

One % point

increase 2014

One % point

decrease 2014

Effect on post retirement medical benefit obligation 1.1 (0.9) 1.7 (1.4)

Effect on the aggregate of current service cost and interest cost 0.1 (0.1) 0.1 (0.1)

(c) Mortality assumptionsThe Trustees of the Bupa Pension Scheme have undertaken a scheme specific mortality investigation as part of the 1 July 2014 triennial valuation.

The Trustees shared the conclusion drawn from this analysis with the directors, who have adopted assumptions in line with this analysis for the purposes of IAS 19 valuation as at 31 December 2015.

The mortality tables adopted at 31 December 2015 are the S2 SAPS year of birth mortality tables using the CMI projection model, with a

long-term rate of improvement of 1.5% pa adjusted by -0.1 years (male non-pensioners); -0.2 years (female non-pensioners); -0.3 years (male pensioners) and -0.5 years (female pensioners). The average life expectancies at age 60 based on these tables for a male currently aged 60 (45) is 27.9 years (29.4 years) and for a female currently aged 60 (45) is 30.1 years (31.7 years).

(d) Assumptions over duration of liabilities The weighted average duration of the defined benefit obligation is approximately 21 years.

(e) Sensitivity analysis of the principal assumptions used to measure scheme liabilitiesThe sensitivity analysis provided below is based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur and experience variations for some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions the same method (projected unit credit method) has been applied as when calculating the pension liability recognised within the statement of financial position. The methods and types of assumption did not change.

Assumption Change in assumption Indicative impact on Scheme liabilities

Discount rate Increase / decrease by 0.25% Decrease / increase by £61mRate of inflation Increase / decrease by 0.25% Increase / decrease by £41mRate of increase in salaries Increase / decrease by 0.25% Increase / decrease by £6mRate of mortality Increase by one year Increase by £30m

3.7Deferred taxation assets

and liabilities

Deferred taxation assets and liabilities in briefDeferred 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 is recognised in full using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.

The following temporary differences are not recognised: goodwill not deductible for taxation purposes and the initial recognition of an asset 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 taxable profit or loss.

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.

Deferred taxation is recognised on temporary differences arising on investments in subsidiary companies, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.

A deferred taxation asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised.

Deferred taxation assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and when the Group can settle its current taxation assets and liabilities on a net basis.

Page 99: Longer, healthier, happier lives

97Bupa Annual Report 2015

Notes to the Financial Statements

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

Assets Liabilities Net

2015 £m

2014 £m

2015 £m

2014 £m

2015 £m

2014 £m

Accelerated capital allowances – – (94.4) (109.0) (94.4) (109.0)

Post employment benefit asset / (liability) – – (64.5) (56.4) (64.5) (56.4)Revaluation of properties to fair value – – (32.7) (58.9) (32.7) (58.9)Employee benefits (other than post employment) 23.8 25.9 – – 23.8 25.9Provisions 23.0 18.0 – – 23.0 18.0Taxation value of losses carried forward 38.1 35.8 – – 38.1 35.8Goodwill and intangible assets – – (105.4) (122.2) (105.4) (122.2)Other 1.4 17.1 (10.9) (1.4) (9.5) 15.7Deferred taxation assets / (liabilities) 86.3 96.8 (307.9) (347.9) (221.6) (251.1)Allowable netting of deferred taxation assets and liabilities (83.8) (94.3) 83.8 94.3 – –Net deferred taxation assets / (liabilities) 2.5 2.5 (224.1) (253.6) (221.6) (251.1)

Recognised deferred taxation assetsDeferred 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.

Unrecognised deferred taxation assetsAs at 31 December 2015, the Group had deductible temporary differences relating to intangible assets of £6.7m (2014: £9.6m), trading losses of £58.0m (2014: £44.3m) and capital losses of £43.4m (2014: £26.6m) for which no deferred taxation asset was recognised due to uncertainty of utilisation of those temporary differences.

Movement in net deferred taxation (liabilities) / assets

At beginning of year £m

Recognised in Income

Statement £m

Recognised in Other Compre- hensive Income

£m

Acquisitions through business

combinations £m

Foreign exchange

£m

At end of year

£m

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

2014Accelerated capital allowances (77.2) (29.8) – (4.8) 2.8 (109.0)Post employment benefit asset / (liability) (14.0) (8.2) (34.2) – – (56.4)Revaluation of properties to fair value (62.5) (3.6) 8.1 (1.5) 0.6 (58.9)Employee benefits (other than post employment) 22.9 4.1 – – (1.1) 25.9Provisions 13.8 (4.6) – 8.8 – 18.0Taxation value of losses carried forward 15.4 6.7 – 14.0 (0.3) 35.8Goodwill and intangible assets (111.2) 12.9 – (27.9) 4.0 (122.2)Other 0.4 32.1 (0.8) (14.5) (1.5) 15.7Total (212.4) 9.6 (26.9) (25.9) 4.5 (251.1)

Page 100: Longer, healthier, happier lives

98Bupa Annual Report 2015

Notes to the Financial StatementsNotes to the Financial

Statements (continued)

for the year ended 31 December 2015

4.0Business combinations

and disposals

Business combinations and disposals in briefA 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) Acquisitions Business combinations are accounted for using the acquisition method. Identifiable assets and liabilities acquired and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest.

The identification and valuation of intangible assets arising on business combinations is subject to a degree of judgement. We engage independent third parties, including Deloitte, EY and Knight Frank, to assist with the identification and valuation process. This is performed in accordance with the Group’s policies.

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. Acquisition accounting must be completed within 12 months of the transaction date.

Costs related to the acquisition are expensed as incurred. A number of acquisitions were made during the year ended 31 December 2015, the details are as follows:

Other

Carrying value at

acquisition £m

Fair value adjustments

£mFair value

£m

Intangible assets 2.2 – 2.2 Property, plant and equipment 38.8 8.1 46.9 Inventories 0.3 – 0.3 Trade and other receivables 3.3 – 3.3 Cash and cash equivalents 0.3 – 0.3Other interest bearing liabilities (1.5) – (1.5) Deferred tax liabilities (0.7) – (0.7) Deferred income (1.7) – (1.7) Trade and other payables (7.2) – (7.2) Provisions for liabilities and charges (0.2) – (0.2)

33.6 8.1 41.7

Net assets acquired 41.7Goodwill 59.7Consideration 101.4

Consideration satisfied by:Cash 97.4 Deferred consideration 4.0 Total consideration paid 101.4

Purchase consideration settled in cash 97.4Additional 17.3% acquisition of Bupa Chile 59.2Cash acquired on acquisition (0.3) Net cash outflow on acquisition 156.3

Date of acquisitionPercentage of holdings

Australia and New ZealandDental Centres – various VariousSpain and Latin America DomesticBupa Chile 5 December 2015 17.3%Dental Centres – various VariousInternational Development MarketsMedicor Sp. z o.o. 1 April 2015 100%Medicor Centrum Medyczne Sp. z o.o 1 April 2015 100%TK-Medyk Sp. z o.o. 30 April 2015 100%Euro-Clinic Sp. z.o.o. Sp. K 30 April 2015 100%Magodent – Magodent Sp. z.o.o 23 July 2015 80%SGB Fortune MA Sp. z.o.o. 21 October 2015 100%SGB Fortune MA Sp. z.o.o. Sp. K 21 October 2015 100%Euro-Clinic Sp. z.o.o. 21 October 2015 100%UKSmiles Centre Limited 28 January 2015 100%Aqua Dental Spa Limited 23 July 2015 100%Hadrian Healthcare Limited 2 December 2015 100%Dental Centres – various Various

Page 101: Longer, healthier, happier lives

99Bupa Annual Report 2015

Notes to the Financial Statements

2015 acquisitionsOn 5 December 2015, the Group exercised its option to acquire an additional 17.3% of the shares of Bupa Chile, for a total consideration of £59.2m (CLP 62.8bn), bringing the total ownership to 73.7% at 31 December 2015.

The exercise of the option triggered a mandatory offer to market for the remaining 26.3% shareholding, as required by local legislation in Chile. As a result, a liability of £91.1m (CLP 95.1bn) in other payables with the corresponding entry in the income and expenditure reserve has been recorded at 31 December 2015. The tender offer expired on 8 January 2016, at which point the Group had secured a 99.7% shareholding. The remaining 0.3% shareholding of the company was acquired in February 2016, making Bupa the sole shareholder of Bupa Chile.

During the year the group has continued to expand its dental businesses in Australia, Spain and the UK. In Australia, a total of 18 clinics were acquired in the year for a total consideration of £21.9m, of which £4.0m is deferred, giving rise to £21.7m of goodwill. In Spain, the group has acquired further dental clinics for a consideration of £1.7m for which goodwill of £1.7m has been realised. In addition, Bupa has acquired five UK dental centres in the year, for a total consideration of £5.3m, net of cash acquired, resulting in goodwill of £6.0m. The goodwill represents the premium paid to acquire established dental practices including the value of dentists (assembled workforce) and other intangibles that do not meet the recognition criteria of IAS 38.

Further investment of £37.1m has been made in Poland during the year with the acquisition of Medicor, a health clinics, diagnostics and pharmacy business; TK Medyk, a diagnostic imaging company; Magodent, a oncology provider and associated properties. In total, goodwill amounting to £21.9m has been recognised for these acquisitions. The goodwill recognised primarily represents a premium paid to acquire a leading oncology provider in Poland to enable delivery of coordinated oncology care as well as further expansion of our geographical reach across Poland.

On 2 December 2015, Bupa acquired 100% of Hadrian Healthcare Limited, a care services business comprising five homes and two development sites in the north of England for £34.7m, exclusive of acquisition costs, with net assets (debt free) of £27.5m and resulting in goodwill of £7.2m. The goodwill represents a portfolio premium for acquiring a care home business.

2014 acquisitions

Date of acquisitionPercentage of holdings

Australia and New ZealandDental Centres – various VariousCargill – NZ Aged Care facility 10 June 2014 100%Spain and Latin America DomesticCruz Blanca Salud (Bupa Chile)* 24 February 2014 56.4%Hospital Virgen del Mar 1 September 2014 100%Alcala and Daroca 15 December 2014 100%International Development MarketsScanlab Sp. z.o.o. 1 April 2014 100%Diagnostic Med Sp. z.o.o. 28 April 2014 100%Centrum Zdrowia Medycyna Sp. z.o.o. 2 June 2014 100%Centrum Medyczne Diagnostyka 1 July 2014 100%UKThe White Dental Company 31 January 2014 100%Barbican Dental Centre 3 February 2014 100%Cranbrook Dental Practice 28 November 2014 100%

* The acquisition agreement included a put and call option over a further 17.3% of the shares of Bupa Chile, meaning it was considered virtually certain that the option would be exercised, transferring the risks and rewards to Bupa. As a result, the total consideration and goodwill recognised on acquisition was calculated on an ownership basis of 73.7%.

Page 102: Longer, healthier, happier lives

100Bupa Annual Report 2015

Notes to the Financial StatementsNotes to the Financial

Statements (continued)

for the year ended 31 December 2015

Bupa Chile Other

Carrying value at

acquisition £m

Fair value adjustments

£mFair value

£m

Carrying value at

acquisition £m

Fair value adjustments

£mFair value

£m

Intangible assets 110.4 97.3 207.7 0.1 – 0.1 Property, plant and equipment 127.3 5.8 133.1 6.7 – 6.7 Investment property 1.9 – 1.9 2.8 – 2.8 Inventories 2.5 – 2.5 0.2 – 0.2 Equity accounted investments 0.3 – 0.3 – – – Financial investments 43.0 – 43.0 – – – Trade and other receivables 43.0 – 43.0 3.0 – 3.0 Assets arising from insurance business 54.9 (45.2) 9.7 – – – Cash and cash equivalents 36.1 – 36.1 0.5 – 0.5 Other interest bearing liabilities (156.5) (1.8) (158.3) (1.1) – (1.1)Deferred tax liabilities (20.2) (5.7) (25.9) – – –Deferred income – – – (0.1) – (0.1)Trade and other payables (101.6) 7.1 (94.5) (3.8) – (3.8)Insurance liabilities (25.5) (19.2) (44.7) – – – Provisions for liabilities and charges – – – (0.1) – (0.1)

115.6 38.3 153.9 8.2 – 8.2

Net assets acquired 153.9 8.2Attributable to non-controlling interests 52.6 – Goodwill 158.2 30.4 Consideration 259.5 38.6

Consideration satisfied by:Cash 198.5 37.4 Fair value of put option consideration

(17.3%) 59.9 – Deferred consideration 1.1 1.2 Total consideration paid 259.5 38.6

Purchase consideration settled in cash 198.5 37.4Cash acquired on acquisition (36.1) (0.5) Net cash outflow on acquisition 162.4 36.9

On 24 February 2014 the Group acquired 56.4% of Bupa Chile (previously Cruz Blanca Salud). Bupa Chile is an integrated healthcare group in Chile, listed on the Bolsa de Santiago stock exchange, and represents Bupa’s first domestic business in Latin America with 640,000 insurance customers, 27 outpatient clinics, three hospitals and Chile’s largest clinical laboratory. It also has a small outpatient and diagnostic business in Peru.

The acquisition will enhance Bupa’s strategic positioning in the health insurance and healthcare sectors in Chile and establish a base for operational expansion and positioning in other Latin American countries.

The goodwill represents a premium paid to acquire a leading integrated healthcare provider in Chile and reflects its strength and potential in the Latin American healthcare market.

The table below details the intangible assets arising as a result of this transaction, which combined with the existing software intangible asset balance of £13.6m, comprise the total intangible asset value of £207.7m. The useful life of the assets from a valuation perspective incorporates the long established nature of the business and the local market conditions, whereas, the useful economic life, used for amortisation purposes encompasses a more pragmatic view, aligned with Group policy and precedent.

The below tables are translated at average rates for the period ended 31 December 2014. The following values have been translated using the spot rates at the date of acquisition; Net Assets £156.7m, Consideration £264.0m and Goodwill £160.8m.

£m

Useful life for valuation purposes

Useful life for amortisation

purposes

Brand and trademarks 156.4 Indefinite Indefinite Various established brandsCustomer relationships (Insurance) 31.5

11yrs

8yrs

Based on forecasted cash flows after expiration of existing contracts (multi-period excess-earnings method)

Customer relationships (Healthcare) 6.2

5yrs

4yrs

Based on forecasted cash flows after expiration of existing contracts (multi-period excess-earnings method)

Total 194.1

Page 103: Longer, healthier, happier lives

101Bupa Annual Report 2015

Notes to the Financial Statements

Other acquisitions in the period include further investment into Poland, with the acquisition of seven diagnostic centres and four outpatient clinics; continued expansion of Bupa’s dental presence in Australia and the UK and an aged care facility in New Zealand.

(b) DisposalsAt the date when the Group ceases to have control in an entity it is remeasured to its fair value, with the changes in carrying value recognised in the Income Statement.

Any amounts relating to the entity that have previously been recognised in the Statement of Comprehensive Income are reclassified to the Income Statement.

The net gain made on the sale of businesses is included within other income and charges in the consolidated income statement.

2015 Disposal and liquidationOn 8 July 2015, Bupa Health Care Asia Pte Ltd, a holding company in Singapore, which was part of the International Developments Markets Market Unit was liquidated. A net gain of £0.3m was recognised and is included within other income and charges in the consolidated income statement.

During 2015, £25.5m deferred consideration was received in relation to the disposal of Bupa Ireland Limited in 2007 and is included within other income and recognised in the consolidated income statement.

2014 Disposals(i) Health Dialog Services CorporationOn 31 March 2014, the Group sold its 100% shareholding in Health Dialog Services Corporation, a health analytics business in the USA, which was part of the International Development Market Unit, for cash proceeds of £12.1m (US$20.0m). Included in net assets divested are intangible assets of £2.7m, property plant and equipment of £1.7m, trade and other receivables of £3.0m, cash of £10.5m and trade and

other payables of £12.5m. The cash proceeds received, net of cash disposed of and disposal costs paid on 31 December 2014 resulted in a cash outflow of £0.6m.

(ii) Surgichem LimitedOn 22 August 2014, the Group sold its 100% shareholding in Surgichem Limited, a medical supply business in the United Kingdom, which was part of the UK Market Unit, for cash proceeds of £12.5m.

Included in net assets divested are inventories of £1.3m, property plant and equipment of £0.1m, trade and other receivables of £1.8m, cash of £0.1m and trade and other payables of £0.7m. The cash proceeds received, net of cash disposed of and disposal costs paid on 31 December 2014 resulted in a cash inflow of £11.5m.

(iii) Continuing CareOn 19 September 2014, the Group sold its assets in Continuing Care, a complex care business in the United Kingdom, which was part of the UK Market Unit, for cash proceeds of £2.4m. The cash proceeds received, net of cash disposed of and disposal costs paid on 31 December 2014, resulted in a cash inflow of £1.9m.

Health Dialog

Services Corporation

Surgichem Limited

Continuing Care

Sale proceeds 12.1 12.5 2.4Adjust for:

Net assets divested (5.4) (2.6) –Transaction costs (2.2) (0.9) (0.5)Revaluation Reserve recycled

upon disposal 5.8 – –Foreign Exchange Reserve

recycled upon disposal 5.9 – –Net gain on disposal of business 16.2 9.0 1.9

4.1Equity accounted

investments

Equity accounted investments in briefEquity accounted investments comprise associated companies and joint ventures.

Associated companies and joint ventures are accounted for using the equity method and are initially recognised at cost. The cost of the investment includes transaction costs.

Associated companies include those entities in which the Group has significant influence, but no ability for rights to direct the activities which determine the variable returns it receives from the entity. Joint ventures include those entities over the activities of which the Group has joint control, established by contractual agreement and requiring unanimous consent for strategic financial and operating decisions. The Group also has the rights to the net assets.

When the Group’s share of losses exceeds its interest in an equity accounted investment, the carrying amount of that interest (including any long-term interests that, in substance, form part of the Group’s net investment), is reduced to nil. In addition, the recognition of further losses is discontinued except to the extent that the Group has an obligation to make payments on behalf of the equity accounted investment.

AssociatesDuring 2015, capital injections of £3.9m (2014: £nil) were made in our investment in Bupa Arabia to maintain a shareholding of 26.25%.

Distributions to shareholders are currently restricted by local regulatory requirements which are reassessed on a regular basis.

Joint VenturesDuring 2015, capital injections of £2.2m (2014: £3.1m) were made in Max Bupa Health Insurance Company Limited to maintain a shareholding of 26%. This investment has been classified as a joint venture as the Group is party to a shareholder agreement for the sharing of joint control. The Group has announced its intention to increase its shareholding in Max Bupa to 49%. Bupa has agreed to acquire an additional 23% of Max Bupa, bringing its total net investment to 49%. The deal is subject to regulatory approval being received in India. Upon completion, the existing shareholder agreement which established the sharing of control is to be replaced and under the proposed new shareholder agreement, Max India will obtain control. On completion of the deal, the Group will continue to exercise significant influence; Max Bupa will be classified as an associate and will continue to be accounted for using the equity method.

The consolidated financial statements include the Group’s share of income and expenses, and Other Comprehensive Income, after 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 £238.0m (2014: £208.9m). All equity investments are included on a coterminous basis.

Page 104: Longer, healthier, happier lives

102Bupa Annual Report 2015

Notes to the Financial StatementsNotes to the Financial

Statements (continued)

for the year ended 31 December 2015

The Group’s principal equity accounted investments are:

Business activity

Share of issued share capital

Principally operates in

Country of incorporation

Bupa Arabia For Cooperative Insurance Company Associate Insurance 26.25% Saudi Arabia Saudi ArabiaHighway to Health, Inc Associate Insurance 49.00% USA USAMax Bupa Health Insurance Company Limited Joint Venture Insurance 26.00% India India

(i) Summarised financial information for associates and joint ventures

The tables below provide summarised financial information for those associates and joint ventures that are material to the Group. The information disclosed reflects the amounts presented in the financial statements of the relevant associates and 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 method, including fair value adjustments and modifications for differences in accounting policy.

Bupa Arabia Highway to Health Max Bupa

Summarised Statement of Financial Position2015

£m2014

£m2015

£m2014

£m2015

£m2014

£m

Cash and cash equivalents 144.5 319.9 51.2 24.4 2.5 2.7Other current assets 888.6 422.4 47.4 56.2 2.9 2.2Current assets 1,033.1 742.3 98.6 80.6 5.4 4.9Non-current assets 79.6 66.5 6.1 8.5 55.6 42.1Current liabilities (783.5) (611.1) (63.2) (57.5) (16.3) (12.9)Non-current liabilities (27.8) (17.8) (0.2) (0.1) (23.6) (17.3)Net assets 301.4 179.9 41.3 31.5 21.1 16.8

Reconciliation to carrying amountsOpening net assets 179.9 117.7 31.5 28.5 16.8 13.5Profit / (loss) for the period 112.5 48.8 5.8 1.2 (7.3) (11.7)Other Comprehensive Expenses / (Income) (4.6) 0.7 – – – –Dividends paid – (3.2) – – – –Other reserve movements 13.6 15.9 4.0 1.8 11.6 15.0Closing net assets 301.4 179.9 41.3 31.5 21.1 16.8% ownership 26.25% 26.25% 49.00% 49.00% 26.00% 26.00%Reporting entity’s share 79.1 47.2 20.2 15.4 5.5 4.4Fair value and local accounting differences (8.5) (4.2) 138.4 140.6 0.4 1.9Carrying amount 70.6 43.0 158.6 156.0 5.9 6.3Reporting entity’s share of profit / (loss) 23.7 9.5 2.6 0.6 (1.9) (3.0)

Max Bupa

Summarised Statement of Comprehensive Income2015

£m2014

£m

Revenue 37.4 30.1Interest income 4.1 3.2Depreciation and amortisation 1.2 1.3Loss for the period (7.3) (11.7)Total Comprehensive Loss (7.3) (11.7)

(ii) Individually immaterial associatesIn 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 £2.9m (2014: £3.6m). The reporting entity’s share of loss recognised during the year for these associates was £2.0m (2014: £1.9m profit).

Page 105: Longer, healthier, happier lives

103Bupa Annual Report 2015

Notes to the Financial Statements

5.0Financial

Investments

Financial investments in briefThe 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 includes transaction costs for financial investments not classified at fair value through the profit or loss.

Financial Investments are derecognised when the rights to receive cash flows from the financial investments have expired or where the Group has transferred substantially all risks and rewards of ownership.

The Group has classified its financial investments into the following categories: at fair value through profit or loss, held to maturity, and loans and receivables. Management determines the classification at initial recognition.

The accounting policy for the impairment of financial investments is detailed in Section 3.0.1.

The analysis of derivatives is disclosed in section 5.2.

Financial investmentsFinancial investments are analysed as follows:

Carrying value 2015

£m

Fair Value 2015

£m

Carrying value 2014

£m

Fair Value 2014

£m

Non-currentDesignated at fair value through profit or loss

Government debt securities 49.8 49.8 125.2 125.2Corporate debt securities and secured loans 242.2 242.2 184.3 184.3Pooled investment funds 110.9 110.9 135.9 135.9Deposits with credit institutions 0.1 0.1 – –

Held to maturityCorporate debt securities and secured loans 98.7 99.2 35.3 35.3Government Debt securities 0.6 0.6 – –

Loans and receivablesDeposits with credit institutions 241.0 246.0 169.5 174.0Corporate debt securities and secured loans 88.2 130.0 83.8 128.5Other Loans 0.4 0.4 – –

Total non-current financial investments 831.9 879.2 734.0 783.2

CurrentDesignated at fair value through profit or loss

Government debt securities 19.3 19.3 23.1 23.1Corporate debt securities and secured loans 3.1 3.1 0.6 0.6Pooled investment funds 35.0 35.0 34.7 34.7Deposits with credit institutions 1.0 1.0 1.3 1.3

Held to maturityCorporate debt securities and secured loans 103.0 103.2 223.1 223.1Government Debt securities – – 1.9 1.9

Loans and receivablesDeposits with credit institutions 1,195.0 1,196.0 968.0 968.8Other loans – – 1.3 1.3

Total current financial investments 1,356.4 1,357.6 1,254.0 1,254.8

Total financial investments 2,188.3 2,236.8 1,988.0 2,038.0

Page 106: Longer, healthier, happier lives

104Bupa Annual Report 2015

Notes to the Financial StatementsNotes to the Financial

Statements (continued)

for the year ended 31 December 2015

Classification Criteria and treatment

Fair value through profit or loss Financial investments designated at fair value through profit or loss consist of investments or instruments where management make decisions based upon their fair value. The investments are carried at fair value, with gains and losses arising from changes in this value recognised in the Income Statement in the period in which they arise.

Held to maturity Held to maturity investments are non-derivative financial assets which are quoted on an active market, with fixed or determinable payments and fixed maturity that an entity has the positive intention and ability to hold to maturity. This is assessed at each reporting date. Held to maturity investments are measured at amortised cost using the effective interest method, less any impairment losses.

Any discount or premium on purchase is amortised over the life of the investment through the Income Statement.

Loans and receivables Loans and receivables are carried at amortised cost calculated using the effective interest method, less impairment losses.

Fair value of financial investmentsFair value is a market-based measurement for assets for observable market transactions where market information might be available. The objective of a fair value measurement is to estimate the price at which an orderly transaction to sell the asset or to transfer the asset would take place between market participants at the measurement date under current market conditions (i.e. an exit price at the measurement date from the perspective of a market participant that holds the asset).

Fair values disclosed in the tables have been calculated as follows:

° debt securities, pooled investment funds, deposits with credit institutions, other loans– quoted price if available or discounted expected future principal and interest cash flows; and

° listed securities – quoted price.

The fair values of quoted investments in active markets are based on current bid prices. The fair values of unlisted securities and quoted investments for which there is no active market, are established by using valuation techniques corroborated by independent third parties.

These may include reference to the current fair value of other investments that are substantially the same and discounted cash flow analysis.

Financial investments carried at fair value are measured using different valuation inputs categorised into a three level hierarchy. The different levels have been defined by reference to the lowest level input that is significant to the fair value measurement, as follows:

° Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;

° Level 2: inputs other than quoted prices included within level one that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

° Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

Page 107: Longer, healthier, happier lives

105Bupa Annual Report 2015

Notes to the Financial Statements

An analysis of financial investments by valuation method is as follows:Non-current Current

Level 1 £m

Level 2 £m

Total Non- current

£mLevel 1

£mLevel 2

£m

Total Current

£m

2015Designated at fair value through profit and loss

Government debt securities 22.7 27.1 49.8 19.3 – 19.3Corporate debt securities and secured loans 42.6 199.6 242.2 3.1 – 3.1Pooled investment funds 35.2 75.7 110.9 35.0 – 35.0Deposits with credit institutions 0.1 – 0.1 – – –Other loans – – – 1.0 – 1.0

Held to MaturityCorporate debt securities and secured loans 68.8 30.4 99.2 94.4 8.8 103.2Government debt securities 0.5 0.1 0.6 – – –

Loans and receivablesDeposits with credit institutions – 246.0 246.0 – 1,196.0 1,196.0Corporate debt securities and secured loans – 130.0 130.0 – – –Other loans – 0.4 0.4 – – –

Total 169.9 709.3 879.2 152.8 1,204.8 1,357.6

2014Designated at fair value through profit and loss

Government debt securities 39.7 85.5 125.2 22.2 0.9 23.1Corporate debt securities and secured loans – 184.3 184.3 0.3 0.3 0.6Pooled investment funds 54.9 81.0 135.9 34.7 – 34.7Deposits with credit institutions – – – – 1.3 1.3

Held to MaturityCorporate debt securities and secured loans 5.3 30.0 35.3 40.9 182.2 223.1Government debt securities – – – 1.9 – 1.9

Loans and receivablesDeposits with credit institutions – 174.0 174.0 – 968.8 968.8Corporate debt securities and secured loans – 128.5 128.5 – – –

Other loans – – – – 1.3 1.3Total 99.9 683.3 783.2 100.0 1,154.8 1,254.8

Currently the Group does not hold any level three financial instruments.

There have been no significant transfers between the valuation methods.

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

2015 %

2014 %

Sterling assets and liabilities 1.1-2.0 1.0-2.1 Australian dollar assets and liabilities 2.1-2.0 2.3-2.2 Euro assets and liabilities (0.4)-(0.2) 0.0-0.6 US dollar assets and liabilities 0.6-2.3 0.2-2.2

Page 108: Longer, healthier, happier lives

106Bupa Annual Report 2015

Notes to the Financial StatementsNotes to the Financial

Statements (continued)

for the year ended 31 December 2015

5.1Borrowings

Borrowings in briefThe Group has various sources of funding including subordinated bonds, senior unsecured bonds and loans.

Subordinated liabilitiesSubordinated liabilities are stated at amortised cost using the effective interest method. The carrying value is 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 rate of the bonds are recognised in the Income Statement as an effective fair value hedge of this exposure.

The coupon payable on the bonds is recognised as a financial expense.

The Group holds callable subordinated perpetual guaranteed bonds with a corresponding fair value hedge. The amortised cost of these borrowings is adjusted for the fair value of the risk being hedged.

Other interest bearing liabilitiesOther interest bearing liabilities consist of senior unsecured bonds, secured loans, bank and other loans and finance lease liabilities. These borrowings are recognised initially as proceeds receivable less attributable transaction costs, net of any discount on issue.

Subsequent to initial recognition, they are stated at amortised cost, net of accrued interest, with any difference between cost and redemption value being recognised in the Income Statement over the period of the borrowings on an effective interest basis.

2015 2014

Note

Non-current

£mCurrent

£mTotal

£m

Non-current

£mCurrent

£mTotal

£m

Subordinated liabilitiesCallable subordinated perpetual guaranteed bonds 330.0 5.9 335.9 330.0 5.9 335.9 Fair value adjustment in respect of hedged interest rate risk 51.3 – 51.3 62.1 – 62.1Callable subordinated perpetual guaranteed bonds

at carrying value (a) 381.3 5.9 387.2 392.1 5.9 398.05.0% subordinated unguaranteed bonds due 2023 (b) 495.9 4.0 499.9 495.3 4.0 499.3Other subordinated debt due 2022 (c) 32.3 – 32.3 32.3 – 32.3Total subordinated liabilities 909.5 9.9 919.4 919.7 9.9 929.6Other interest bearing liabilitiesSenior unsecured bonds (d) 387.1 366.8 753.9 739.7 16.5 756.2

Secured loans (e) 233.5 4.3 237.8 222.5 15.7 238.2Bank loans (f) 97.0 50.2 147.2 109.9 27.6 137.5Finance lease liabilities (g) 9.2 6.6 15.8 14.8 7.9 22.7Total other interest bearing liabilities 726.8 427.9 1,154.7 1,086.9 67.7 1,154.6

Total borrowings 1,636.3 437.8 2,074.1 2,006.6 77.6 2,084.2

(a) Callable subordinated perpetual guaranteed bondsIn December 2004, Bupa Finance plc issued £330.0m of callable subordinated perpetual guaranteed bonds, which are guaranteed by Bupa Insurance Limited. Interest is payable on the bonds at 6.125% pa. The bonds have no fixed maturity date but a call option is exercisable by Bupa Finance plc to redeem the bonds on 16 September 2020. In the event of the winding up of Bupa Finance plc or Bupa Insurance Limited, the claims of the bondholders are subordinated to the claims of other creditors of these companies.

The bond is designated in a fair value hedge relationship (section 5.4.2.2). The total fair value of the callable subordinated perpetual guaranteed bonds, net of accrued interest, is £387.2m (2014: £398.0m). 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.

(b) 5.0% subordinated unguaranteed bonds due 2023On 25 April 2013, Bupa Finance plc issued £500.0m of unguaranteed subordinated bonds which mature on 25 April 2023. Interest is 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 claims of other creditors of that company.

(c) Other subordinated debt due 2022Subordinated debt of £32.3m (€41.6m) issued by Torrejón Salud SA matures on 31 December 2022. Interest accrues on the debt at EURIBOR +6%. In the event of a winding up of Torrejón Salud SA, the claims of the holder of the debt are subordinated to the claims of the senior creditors of that company.

(d) Senior unsecured bondsOn 2 July 2009, Bupa Finance plc issued £350.0m of 7.5% senior unsecured bonds. The bonds are repayable in July 2016. They are guaranteed by the Company and other Group subsidiary companies.

On 17 June 2014, Bupa Finance plc issued £350.0m of senior unsecured bonds, guaranteed by the Company, which mature on 17 June 2021. Interest payable on the bonds is 3.375% per annum.

On 30 June 2012 Cruz Blanca Salud S.A. issued Unidad de Fomento (UF – an inflation linked currency commonly used in Chile) 1.6m (£38.0m) of inflation linked senior unsecured bonds which mature on 30 June 2033. Interest payable on the bonds is 4.23% per annum.

Page 109: Longer, healthier, happier lives

107Bupa Annual Report 2015

Notes to the Financial Statements

(e) Secured loansThe secured loans balance of £237.8m (2014: £238.2m) relates to a loan issue by UK Care No 1 Limited. On 17 February 2000, UK Care No 1 Limited issued two classes of secured notes. A £175.0m Class A1 note is due to mature in 2029 and a £60.0m Class A2 note is due to mature in 2031. The A1 and A2 loan notes bear a fixed interest rate of 6.3% and 7.5% respectively. The loan notes are secured by fixed and floating charges over the assets and undertakings of UK Care No 1 Limited. The security includes UK Care No 1 Limited’s overriding lease interest, and the rental income receivable, held in a number of the Group’s care homes which eliminates on consolidation. The carrying value of the property, plant and equipment of these homes is £555.7m (2014: £539.4m).

(f) Bank loans and bank overdraftBank loans of £147.2m (2014: £137.5m) include a tri syndicated loan held in Especializada y Primaria L’Horta-Manises SA of £24.8m (2014: £27.9m) and a portfolio of loans held in Bupa Chile totalling £113.0m (2014: £103.8m).

Bupa maintains a £800.0m revolving credit facility which was renegotiated in August 2015 and matures in July 2020 with an option to extend by a further two years. The facility was undrawn at 31 December 2015 with the exception of £6.4m of outstanding letters of credit for general business purposes.

Drawings under the £800.0m facility are guaranteed by the Company and other Group subsidiary companies. The overdraft facilities are subject to cross guarantees within the Group. The bank loans and overdrafts bear interest at commercial rates linked to LIBOR, or EURIBOR, or at a commercial fixed rate.

(g) Obligations under finance leasesFuture minimum payments under finance leases are as follows:

Future minimum

lease payments

2015 £m

Present value of

minimum lease

payments 2015

£m

Future minimum

lease payments

2014 £m

Present value of

minimum lease

payments 2014

£m

Payable within one year 7.3 6.6 8.6 7.8Payable after one year

but within five years 9.2 8.3 14.6 13.0Payable after five years 1.2 0.8 2.4 1.9Total gross payments 17.7 25.6Less: finance charges

included above (1.9) (2.9)Total payments net of

finance charges 15.8 15.7 22.7 22.7

Fair value of borrowings

2015 2014

Level 1 £m

Level 2 £m

Total £m

Level 1 £m

Level 2 £m

Total £m

Subordinated liabilities 870.6 32.3 902.9 880.3 44.5 924.8

Bank loans – 147.2 147.2 – 137.5 137.5 Senior unsecured bonds 719.4 38.7 758.1 748.1 47.3 795.4 Secured loan 314.8 – 314.8 324.7 – 324.7 Finance lease liabilities – 15.8 15.8 – 22.7 22.7 Total 1,904.8 234.0 2,138.8 1,953.1 252.0 2,205.1

Fair value is a market-based measurement for liabilities for observable market transactions where market information might be available. The objective of a fair value measurement is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions (i.e. an exit price at the measurement date from the perspective of a market participant that owes the liability). Fair values disclosed in the table above have been calculated as follows:

° Subordinated liabilities – quoted price if available or discounted expected future principal and interest cash flows;

° Senior unsecured bonds – quoted price; and

° Secured loans – quoted price.

The fair value of quoted liabilities in active markets are based on current bid prices. The fair values of financial liabilities for which there is no active market, are established using valuation techniques corroborated by independent third parties. These may include reference to the current fair value of other instruments that are substantially the same and discounted cash flow analysis.

Financial liabilities are categorised into a three level hierarchy, a description of the different levels is detailed in Section 5.0 along with the market interest rates used to discount financial liabilities, where the fair value cannot otherwise be found from quoted market values.

An analysis of the fair value of borrowings by valuation method is above.

Currently the Group does not hold any level three financial liabilities.

Page 110: Longer, healthier, happier lives

108Bupa Annual Report 2015

Notes to the Financial StatementsNotes to the Financial

Statements (continued)

for the year ended 31 December 2015

5.2Derivatives

Derivatives in briefA derivative is a financial instrument whose value is based on one or more underlying assets. The group only uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risk. Derivatives are not traded for speculative purposes.

Derivatives that have been purchased or issued as part of a hedge that subsequently does not qualify for hedge accounting are accounted for at fair value through profit and loss.

Derivative financial instruments are initially recognised and subsequently measured at fair value.

Fair values are obtained from market observable pricing information including interest rate yield curves. The value of foreign exchange forward contracts is established using listed market prices.

Fair values have been calculated for each type of derivative as follows:

° Currency forward contracts and swaps – quoted prices in an inactive market at balance sheet date; and

° Interest rate swaps bank or broker quotes.

All derivatives are disclosed as level two in the three level hierarchy.

2015

£m2014

£m

Derivative assetsNon-current* 51.3 62.1Current 6.0 6.9Total derivative assets 57.3 69.0

Derivative liabilities Non-current (10.3) (73.1)Current (22.1) (3.8)Total derivative liabilities (32.4) (76.9)

* See fair value hedges in Section 5.4.2.2.

5.3Capital

management

Capital management in briefBupa 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.

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, bond investors, regulators and trading partners while deploying capital efficiently and managing risk to enable Bupa to continue to deliver its purpose in a sustainable manner. All profits are therefore reinvested to develop the Group’s business for the benefit of current and future customers.

There have been no changes to the Group’s capital management objectives during the year.

The Group’s capital resources are managed in line with the Group Capital Management Policy. All regulated entities within the Group maintain sufficient capital resources to meet any minimum capital requirement required by the local Regulators. In addition the Group and regulated entities maintain a buffer in excess of the regulatory minimum requirements in line with their capital risk appetites.

The Group’s capital position is kept under constant review and is reported monthly to the Board.

The Group has target ranges for solvency, leverage and interest cover ratios with a view to maintaining an A-/A3 long-term senor credit rating for Bupa Finance plc. The Bupa Group as a whole is not rated by any rating agency. Individual debt issues and certain subsidiaries within the Group have public ratings.

The Group’s capital comprises equity, exclusive of any non-controlling interests, together with eligible subordinated debt. The Group has £330m of callable subordinated perpetual guaranteed bonds and a £500m dated hybrid bond which matures on 25 April 2023. These bond issues are accounted for as liabilities in the IFRS based financial statements, but are treated as solvency capital for regulatory and management purposes.

Since 1 January 2016, the Group has been subject to the requirements of the Solvency II Directive and must hold sufficient capital to cover its Group Solvency Capital Requirement (‘SCR’) which takes account of all the risks in the Group, including those related to non-insurance businesses. The Group SCR is calculated in accordance with the Standard Formula specified in the Solvency II legislation. Bupa has obtained approval from the Prudential Regulation Authority to substitute the insurance premium risk parameter in the Standard Formula with an Undertaking Specific Parameter (‘USP’) which reflects Bupa’s own loss experience.

At least annually, the Group carries out an Economic Capital Assessment (‘ECA’) in which it makes its own quantification of how much capital is required to support its risks. The ECA is used to assess how well the Standard Formula SCR reflects the Group’s actual risk profile.

The ECA forms part of the Own Risk and Solvency Assessment (‘ORSA’) which comprises all the activities by which the Group establishes the level of capital required to meet its solvency needs over the planning period given the Group’s strategy and risk appetite. The conclusions from these activities are summarised in the ORSA Report which is reviewed by the Risk Committee, approved by the Board and submitted to the Prudential Regulation Authority annually.

At 31 December 2015, Bupa’s eligible Own Funds, determined in accordance with the Solvency II valuation rules, were £3.1bn1, which was in excess of the Group estimated SCR of £1.7bn. This represented a solvency coverage ratio of 180%.

The Solvency II rules supersede those of the IGD. At the 31 December 2015, the IGD regime applied. Bupa’s IGD capital resources were £2.3bn (2014: £2.6bn), which was in excess of a capital requirement of £0.9bn (2014: £0.8bn). This represented a solvency coverage ratio of 267% (2014: 319%).

1 The Solvency II Capital Position (Own Funds and Solvency Capital Requirement) and related disclosures are estimated values.

Page 111: Longer, healthier, happier lives

109Bupa Annual Report 2015

Notes to the Financial Statements

5.4Risk management

Risk management in briefThe 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’ model.

1. Business management is responsible for the identification and assessment of risks and controls.

2. Risk functions provide support and challenge the completeness and accuracy of risk assessments and the adequacy of mitigation plans.

3. Internal audit provides independent and objective assurance on the robustness of the risk management framework, and the appropriateness and effectiveness of internal controls.

The current principal risks of the Group and its inherent risks and how they are mitigated are described on page 109-117.

The Group has adopted a risk management strategy that endeavours to mitigate these risks, which is approved by the Board. In managing these exposures, the Treasury and Investment Committee reviews and monitors any significant investment and market risks.

The Group has exposure to a number of risks from its use of financial instruments and risks associated with its insurance business. These have been categorised into the following types of risk, and details of the nature, extent, and how the Group has managed these risks is described below:

(i) Insurance risk

(ii) Market risk

(iii) Credit risk

(iv) Liquidity risk

5.4.1Insurance risk

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

(i) Underwriting riskUnderwriting risk refers to the potential deviation from the actuarial assumptions used for setting insurance premium rates which could lead to premium inadequacy. Underwriting risk is therefore concerned with both the setting of adequate premium rates (pricing risk) as well as the management of claims (claims risk) for insurance policies underwritten by the Group.

(ii) Pricing riskPricing risk relates to the setting of adequate premium rates taking into consideration the volume and characteristics of the insurance policies issued. External influences to pricing risk include (but are not limited to) competitors’ pricing and product design initiatives, and regulatory environments. The level of influence from these external factors can vary significantly between regions and largely depend on the maturity of health insurance markets and the role of the regulator. Thorough actuarial analysis performed on a regular basis combined with an understanding of local market dynamics and the ability to change insurance premium rates when necessary can act as effective risk mitigations.

In every general insurer in the Group, the dominant product or policy category is of an annually renewable health insurance contract. This permits insurance premium rate revisions to respond reasonably quickly to changes in customer risk profiles, claims experience and market considerations.

The ability to review benefit levels and premium rates is a significant mitigant to pricing risk. The Group underwrites no material general insurance business that commits it to cover risks at premiums fixed beyond a twelve-month period from inception or renewal.

(iii) Claims riskClaims risk is the risk of failure in managing Bupa’s exposure to claims inflation and fluctuations in claims leading to losses. This can be driven by an adverse fluctuation in the amount and incidence of claims incurred, higher than expected future claims on existing policies with past exposures, and external factors such as medical inflation. Claims reserving risk is part of claims risks and it is a risk of mis-estimation of claims reserve.

Claims risk is managed and controlled by means of pre-authorisation of claims, outpatient benefit limits, the use of consultant networks and agreed networks of hospitals and charges. Specific claims management processes vary across the Group depending on local requirements, market environment and practice.

Future adverse claims experience, for example, which is caused by external factors such as medical inflation, will affect cash flows after the date of the financial statements. Recent adverse claims experience is reflected in these financial statements in claims paid and in the movement in the claims provisions.

Generally, the Group’s health insurance contracts contain terms and conditions that provide for the reimbursement of incurred medical expenses for treatment related to acute medical conditions. The contracts do not provide for capital sums or indemnified amounts. Therefore claims experience is underpinned by prevailing rates of illness. Additionally, claims risk is generally mitigated by insurers running control processes to ensure that both the treatments and the resulting reimbursements are appropriate.

(iv) Reserving riskReserving risk is the risk that provisions made for claims prove to be insufficient in light of later events and claims experience. There is a relatively low exposure to reserving risk compared to underwriting risk due to the very short-term nature of our claims development patterns. The short-term nature of the Group’s general insurance contracts means that movements in claims development assumptions are generally not significant. The development claims settlement patterns are kept under constant review to maintain the validity of the assumptions and hence the validity of the estimation of recognised general insurance liabilities.

The amount of claims provision at any given time that relates to potential claims payments that have not been resolved within one year is relatively small in the context of the Group. Also, of the small provisions that do relate to longer than one year, it is possible to predict with reasonable confidence the outstanding amounts.

Page 112: Longer, healthier, happier lives

110Bupa Annual Report 2015

Notes to the Financial StatementsNotes to the Financial

Statements (continued)

for the year ended 31 December 2015

(v) Other risks related to underwriting health insurance businessClaims provisions are not discounted and their short-term nature means that changes in interest rates have no impact on reserving risk. In addition, the future premium income and claims outflows of health insurance premium liabilities are largely unaffected by changes in interest rates. However, changes to inflationary factors such as wage inflation and medical provider cost inflation affect the financial soundness of health insurance businesses.

None of the Group’s general insurance contracts contain embedded derivatives so the contracts do not give rise to interest rate risk.

The Group is exposed to foreign currency risk through some of the insurance liabilities which are settled in a local currency. Where possible these liabilities are matched to assets in the relevant currency to hedge this exposure.

All of the Group’s general insurance activities are single line health portfolios. Even though only one line of business is involved, the Group does not have significant concentration of insurance risk for the following reasons:

° broad geographical diversity across several markets – including the UK, Spain, Australia, Latin America, the Middle East, Hong Kong and Thailand;

° product diversity between domestic and expatriate, and individual and corporate health insurance; and

° a variety of claims type exposures across diverse medical providers; consultants, nursing staff, clinics, individual hospitals and hospital groups.

The Group as a whole, and its principal general insurance entities, are well diversified. Only in selected circumstances does the Group use reinsurance. The reinsurance used does not give rise to a material counterparty default credit risk exposure to the Group.

(vi) Catastrophe riskEither a natural disaster or a manmade disaster could potentially lead to a large number of claims and thus higher than expected claims costs. Such risks are reduced by excess of loss cover by Bupa and external providers. Bupa’s Centre Risk oversees the risk management of this risk exposure, and Bupa’s Centre Actuarial function oversees and implement strategic improvements to ensure overall adequacy of these arrangements.

5.4.2Market risk

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

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

In order to reduce the risk of assets being insufficient to meet future policyholder obligations, the Group actively manages assets using an approach that balances duration, quality, diversification, liquidity and investment return.

The Group manages price risk by ensuring that the majority of its cash and investments are held with highly rated credit institutions. Where the Group has moved away from straight money market investments and invested in a limited portfolio of return seeking assets (principally bonds), the Group uses a value at risk analysis (VaR) to quantify risk, taking account of asset volatility and correlation between asset classes. This portfolio is held in the UK and Australian insurance companies and was £342.8m at 31 December 2015 (2014: £373.3m). The one year VaR figure at a 95% confidence level attributable to the portfolio is £20.8m at 31 December 2015 (2014: £27.3m).

5.4.2.1 Foreign exchange riskThe Group is exposed to foreign exchange risks arising from commercial transactions and from recognising assets, liabilities and investments in overseas operations. The Group is exposed to both transaction and translation risk. The former is the risk that a company’s cash flows and realised profits may be impacted by movements in foreign exchange rates. The latter arises from translating the financial statements of a foreign operation into the Group’s functional currency.

The results and financial position of the Group’s foreign entities that do not have a functional currency of sterling are translated into sterling as follows:

° assets and liabilities at the exchange rate at the balance sheet date;

° income and expenses at average rates for the period.

All foreign exchange differences arising on translation are recognised initially in the Statement of Comprehensive Income, and only in the Income Statement in the period in which the entity is eventually disposed.

The following significant exchange rates applied during the year:

Average rate Closing rate

2015 2014 2015 2014

Australian dollar 2.0370 1.8265 2.0210 1.9082Chilean peso 1,001.2247 939.6963 1,044.1436 944.4301Danish krone 10.2797 9.2514 10.1194 9.5871Euro 1.3782 1.2411 1.3560 1.2877Hong Kong dollar 11.8520 12.7759 11.4186 12.0805New Zealand dollar 2.1963 1.9852 2.1544 1.9989

Polish zloty 5.7671 5.1929 5.7834 5.5166

Thai baht 52.3953 53.5019 53.0735 51.2721US dollar 1.5288 1.6475 1.4734 1.5581

In the consolidated financial statements, where a loan between Group entities results in an exchange gain or loss, then it is recognised in the Statement of Comprehensive Income to the extent that it relates to the Group’s net investment in overseas operations.

Page 113: Longer, healthier, happier lives

111Bupa Annual Report 2015

Notes to the Financial Statements

Bupa has exposure to foreign exchange risk arising from its overseas operations. Key exposures are to the Australian dollar, Euro, Polish zloty, New Zealand dollar, Hong Kong dollar, Chilean peso, US dollar, Danish krone and Thai baht:

Net currency exposure

£m

Currency contracts

£m

Net currencyexposureincluding

hedges£m

2015

Australian dollar 2,158.1 (79.0) 2,079.1Euro 681.8 (329.0) 352.8Polish zloty 391.4 – 391.4New Zealand dollar 366.8 – 366.8

Hong Kong dollar 284.7 – 284.7

Chilean peso 170.0 – 170.0US dollar 183.8 (128.5) 55.3Danish krone 7.0 7.5 14.5Thai baht 16.0 – 16.0Other 21.6 – 21.6Total foreign currency

denominated net assets 4,281.2 (529.0) 3,752.2Percentage of Group net assets 78.9% 69.2%

Net currency exposure

£m

Currency contracts

£m

Net currencyexposureincluding

hedges£m

2014

Australian dollar 2,165.8 (84.7) 2,081.1Euro 657.5 (336.5) 321.0Polish zloty 362.5 – 362.5New Zealand dollar 350.2 – 350.2

Hong Kong dollar 267.1 – 267.1

Chilean peso 241.8 – 241.8US dollar 151.4 (133.8) 17.6Danish krone 21.1 (9.0) 12.1Thai baht 14.6 – 14.6Other 11.8 21.1 32.9Total foreign currency

denominated net assets 4,243.8 (542.9) 3,700.9Percentage of Group net assets 77.6% 67.7%

Certain forward currency contracts are entered into to hedge net monetary asset exposure and future cash flows of the Group, and do not form part of designated hedging arrangements.

Foreign currency transactions in the Group’s subsidiary companies are measured using the functional currency of the subsidiary company, which is based on the primary economic environment in which the subsidiary operates. The transactions are translated into the functional currency at the exchange rate ruling at the date of the transaction.

Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rate ruling at the balance sheet date; the resulting foreign exchange gain or loss is recognised in operating expenses, except where the gain or loss arises on financial assets or liabilities, when it is presented in financial income or financial expense as appropriate.

Non-monetary assets and liabilities, denominated in a foreign currency at historical cost (with the exception of deferred acquisition costs and unearned premiums) are translated using the exchange rate at the date of the transaction; therefore no exchange differences arise. Deferred acquisition costs and unearned premiums denominated in foreign currency are translated at the average exchange rate for the period. Foreign exchange differences that arise on retranslation are recognised in operating expenses.

Non-monetary assets and liabilities denominated in a foreign currency at fair value are translated using the exchange rate ruling at the date that the fair value was determined. Foreign exchange differences that arise on retranslation are recognised in operating expenses.

Transactional exposures arise primarily in Bupa Global’s businesses as a result of differences between the currency of local revenues and costs. Programmes are in place to hedge a significant proportion of forecast cash flows in those businesses through forward foreign exchange contracts for the coming year. These contracts are not designated hedges. The remaining currency exposures are deemed to be acceptable but are kept under review by management.

Page 114: Longer, healthier, happier lives

112Bupa Annual Report 2015

Notes to the Financial StatementsNotes to the Financial

Statements (continued)

for the year ended 31 December 2015

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

Strengthening 10% Weakening 10%

Gains / (losses) included in Income

Statement £m

Gains / (losses) included in Equity

£m

Gains / (losses) included in Income

Statement £m

Gains / (losses) included in Equity

£m

2015Australian dollar (25.2) (189.0) 30.8 231.0Euro (7.1) (32.1) 8.7 39.2US dollar (4.0) (5.0) 4.9 6.1New Zealand dollar (1.5) (33.3) 1.9 40.8Polish zloty (1.1) (35.6) 1.3 43.5Chilean peso 1.1 (15.5) (1.3) 18.9Hong Kong dollar (0.5) (25.9) 0.6 31.6Danish krone (0.7) (1.3) 0.9 1.6Other (1.0) (4.8) 1.2 5.9Total sensitivity (40.0) (342.5) 49.0 418.6

2014Australian dollar (28.9) (189.2) 35.4 231.2Euro (7.8) (29.2) 9.5 35.7US dollar (7.0) (1.6) 8.5 2.0New Zealand dollar (1.8) (31.8) 2.2 38.9Polish zloty (0.8) (33.0) 1.0 40.3Chilean peso (0.4) (22.0) 0.5 26.9Hong Kong dollar (0.1) (24.3) 0.1 29.7Other (0.5) (5.5) 0.7 6.7Total sensitivity (47.3) (336.6) 57.9 411.4

Foreign exchange hedging activitiesThe Group manages its exposure to foreign exchange risk by entering into hedging transactions using derivative financial instruments. The Group applies fair value, cash flow and net investment hedge accounting.

The hedging relationship between a hedging instrument and a hedged item is formally documented. Documentation includes the risk management objectives and the strategy in undertaking the hedge transaction.

(a) Fair value hedgesWhere a derivative financial instrument hedges the change in fair value of a recognised asset or liability or an unrecognised firm commitment, any gain or loss on remeasurement of the hedging instrument at fair value is recognised in the Income Statement. The hedged item is fair valued for the hedged risk with any adjustment being recognised in the Income Statement.

The group holds foreign currency forward contracts that hedge the Group’s currency exposure, which arises from holding US dollar and Euro denominated financial investments classed as pooled investment funds and corporate bonds.

(b) Cash flow hedgesWhere a derivative financial instrument hedges the change in cash flows related to a recognised asset or liability, a firm commitment or a highly probable forecast transaction, it is accounted for as a cash flow hedge.

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 flows of the hedging instrument. The effective portion of any gain or loss on the hedging instrument is recognised directly in Other Comprehensive Income until the forecast transaction occurs and results in the recognition of a financial asset or liability which impacts the Income Statement. The ineffective portion of the gain or loss is recognised in the Income Statement.

If the hedged cash flow is no longer expected to take place, all deferred gains and losses are released to the Income Statement immediately. If the hedging instrument or hedge relationship is terminated but the hedged transaction is still expected to occur, the cumulative gain or loss at that point remains in Other Comprehensive Income and is recognised in accordance with the above policy when the transaction occurs.

In 2015 there were no derivative financial instruments assigned in cash flow hedge relationships to hedge foreign exchange risks.

In 2014, foreign currency forward contracts were entered into to hedge cash outflows for the acquisition of Cruz Blanca Salud CLP168.5bn (£185.8m), acquired February 2014. This hedge resulted in a cash flow hedge reserve loss of £1.5m.

At 31 December 2015, the cash flow hedge reserve amounts to £20.8m (2014: £20.0m) and all cash flow hedges had been settled.

Page 115: Longer, healthier, happier lives

113Bupa Annual Report 2015

Notes to the Financial Statements

(c) Net investment hedgingThe Group applies hedge accounting to its foreign currency exposure on a net investment basis. By designating opposing instruments in the same currency, the net exposure to currency fluctuations is reported. The Group uses foreign currency forward contracts, foreign currency zero cost collar options and foreign currency borrowings to hedge its net investment foreign exchange risk.

A collar option is an instrument that combines the purchase of a cap and the sale of a floor to specify a range in which a foreign currency rate will fluctuate. The instrument insulates the buyer against the risk of a significant weakening of a foreign currency rate, but limits the benefit of a strengthening of that foreign currency rate. Collar options are only exercised, at specified intervals, if the benchmark rate is exceeded. Settlement amounts are calculated by reference to the agreed notional amounts.

If an external foreign currency denominated loan is used as a hedge, the portion of the exchange gains or losses arising from the retranslation, that is found to be an effective hedge, is recognised in the Statement of Other Comprehensive Income. The same treatment is applied to both the realised and unrealised exchange gains and losses arising from foreign currency forward contracts and foreign currency collar options.

These hedging relationships are documented and tested as required by IAS 39.

All foreign currency forward contracts and collar options are accounted for on a fair value basis.

Australian dollar translation exposureThe Group’s Australian dollar translation exposure of £2,158.1m (AU$4,361.4m) (2014: £2,165.8m (AU$4,132.8m)) arises from the net assets of Australian Dollar denominated businesses. At 31 December 2015, the Group held foreign currency forward contracts totalling a notional £45.7m (AU$92.4m) (2014: £70.9m (AU$136.8m)) and collar options totalling £99.9m (AU$200.0m) (2014: £51.4m (AU$100.0m)) to hedge a portion of net assets, which have been designated as hedges under IAS 39. At 31 December 2015, none of the options were in the money. In 2015, no gain or loss (2014: £0.7m) is reflected in Other Comprehensive Income. Collar options totalling AU$100.0m mature within one year (2014: AU$100.0m) from balance sheet date. The forward contracts mature within one year from balance sheet date.

Euro translation exposureEuro translation exposure of £681.8m (€924.5m) (2014: £657.5m (€846.7m)) arises from the net assets of Euro denominated businesses. At 31 December 2015, the Group held Euro forward foreign exchange contracts totalling £231.3m (€313.7m) (2014: £248.9m (€313.7m)) to hedge a portion of these net assets, all of which have been designated as hedges under IAS 39. The forward contracts mature within one year from balance sheet date and are rolled forward on an ongoing basis.

Effect of foreign exchange hedging transactionsThe impact of net investment currency hedging activity is set out below. The ineffective portion of all hedges recognised in the Income Statement was £nil (2014: £nil).

Gains / (losses) included in Other Comprehensive Income are:

Currency contracts

2015£m

2014£m

Euro 12.2 17.1Danish krone (4.5) –Chilean peso – (1.5)Australian dollar 0.8 1.2Other – (0.8)Total 8.5 16.0

5.4.2.2 Interest rate riskInterest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

The Group is exposed to interest rate risk arising from fluctuations in market rates. This affects both the return on floating rate assets, the cost of floating rate liabilities and the balance sheet value of its investment in fixed rate bonds. Floating rate assets represent a natural hedge for floating rate liabilities.

The net balance on which the Group is exposed as at 31 December 2015 was £2,153.8m (2014: £1,232.9m). The rate at which maturing deposits are reinvested represents a significant potential risk to the Group, in currencies such as sterling and Australian dollar where the Group has a significant net floating cash position.

The Group has also used interest rate swaps to manage interest rate exposure whereby the requirement to settle interest at fixed rates has been swapped for floating rates. This increases the ability to match floating rate assets with floating rate liabilities.

The anticipated repayment profile of interest bearing financial liabilities is as follows:

Variable£m

Fixed£m

Total£m

20152016 (27.3) (410.0) (437.3)2017 (16.0) (8.2) (24.2)2018 (15.7) (7.2) (22.9)2019 (2.9) (2.9) (5.8)2020 (385.0) (3.0) (388.0)2021–2025 (17.3) (867.1) (884.4)After 2025 (46.7) (264.8) (311.5)Total (510.9) (1,563.2) (2,074.1)

20142015 (13.3) (64.2) (77.5)2016 (8.1) (360.4) (368.5)2017 (17.0) (7.8) (24.8)2018 (18.2) (6.8) (25.0)2019 (4.4) (2.4) (6.8)2020–2024 (441.7) (873.1) (1,314.8)After 2024 – (266.8) (266.8)Total (502.7) (1,581.5) (2,084.2)

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 least annually.

The impact of a hypothetical rise of 100 bps in interest rates at the reporting date, on an annualised basis, would have (decreased) / increased equity and surplus by £8.6m (2014: £(3.2)m). The impact of a fall of 100 bps in interest rates, on an annualised basis, would have the inverse effect. This calculation is based on the assumption that all other variables, in particular foreign exchange rates, remain constant.

Interest rate hedging activitiesThe Group applies fair value hedges and cash flow hedges in order to hedge its exposure to interest rate risk.

Page 116: Longer, healthier, happier lives

114Bupa Annual Report 2015

Notes to the Financial StatementsNotes to the Financial

Statements (continued)

for the year ended 31 December 2015

(i) Fair value hedgesInterest rate swaps totalling £330.0m have been entered into to swap the fixed rate coupon on the £330.0m callable subordinated perpetual guaranteed bond to a floating rate. The swaps mature in September 2020. These interest rate swaps are designated as fair value hedges of the underlying interest rate risk on the debt. The fixed receipt occurs annually on the payment of the bond coupon in September. The variable payment is settled quarterly and the rate is reset on the floating element at this time. In the year ended 31 December 2015, the fair value movement in the bond attributable to the hedged risk amounted to £10.8m gain (2014: £12.1m loss). The fair value movement on the interest rate swaps amount to £10.8m loss (2014: £12.1m gain).

(ii) Cash flow hedgesDuring 2009, interest rate swaps were designated to hedge the variability of cash flows associated with £29.7m (€40.3m) (2014: £31.3m (€40.3m)) of floating rate debt in Especializada Y Primaria L’Horta Manises which matures on 30 December 2018. The swaps currently cover 70.0% of the floating rate loan principal balance outstanding at the balance sheet date. At 31 December 2015, the fair value of the interest rate swap liability was £2.3m (€3.1m) (2014: £3.2m (€4.1m)). During 2015, a gain of £0.7m (€1.0m) (2014: £0.1m (€0.1m)) was recognised through Other Comprehensive Income.

Within the Bupa Chile business, cross currency swaps have been designated to hedge the variability of cash flows associated with £37.6m (CLP39.3bn) (2014: £41.7m (CLP39.3bn)) of floating rate debt maturing June 2018. The interest payments have been swapped from floating rate CLP to fixed rate UF. At 31 December 2015, the fair value of the interest rate swap liability was £7.6m (CLP7.9bn) (2014: 8.8m (CLP: 8.3bn)). During 2015, a gain of £0.4m (CLP 0.4bn) (2014: loss of £2.7m (CLP 2.5bn) was recognised through Other Comprehensive Income.

5.4.3Credit risk

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

Credit risk is the risk of loss in the value of financial and insurance assets due to counterparties failing to meet all or part of their contractual obligations.

Investment exposure with external counterparties is managed by ensuring there is a sufficient spread of investments and that all counterparties are rated at least A by two of the three key rating agencies used by the Group (unless specifically approved by the Treasury and Investment Committee).

The investment profile at 31 December is as follows:

2015 £m

2014 £m

Investment grade counterparties 3,254.7 3,059.4Non-investment grade counterparties 183.6 169.5Total 3,438.3 3,228.9

Investment grade counterparties include restricted assets of £55.9m (2014: £53.2m). Non-investment grade counterparties are those related below BBB-/ Baa3, and mainly comprises corporate bonds, pooled investment funds of £128.9m (2014: £127.4m), cash and cash equivalents of £54.7m (2014: £40.8m) and other loans of £0.2m (2014: £1.3m).

Page 117: Longer, healthier, happier lives

115Bupa Annual Report 2015

Notes to the Financial Statements

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

Neither past due or

impaired £m

0–3 months

£m

3–6 months

£m

6 months– 1 year

£m

Greater than 1 year

£m

Impair- ment

£m

Total carrying

value in the balance

sheet£m

2015Debt Securities and other loans 605.3 – – – – – 605.3Pooled investment funds 145.9 – – – – – 145.9Deposits with credit institutions 1,437.1 – – – – – 1,437.1Reinsurers’ share of insurance provisions 4.8 – – – – – 4.8Insurance debtors¹ 800.3 68.8 6.0 26.4 4.5 (18.2) 887.8Investment receivables and accrued investment incomes 2.6 0.1 – 0.1 1.9 – 4.7Trade and other receivables² 281.6 134.0 16.8 21.3 96.0 (15.3) 534.5Total financial and insurance assets 3,277.6 202.9 22.8 47.8 102.4 (33.5) 3,620.1

2014Debt Securities and other loans 678.6 – – – – – 678.6Pooled investment funds 170.6 – – – – – 170.6Deposits with credit institutions 1,138.7 – – – – – 1,138.7Reinsurers’ share of insurance provisions 15.8 – – – – – 15.8Insurance debtors1 772.8 63.9 2.3 15.9 0.4 (21.5) 833.8Investment receivables and accrued investment income 3.1 0.1 – 0.1 1.9 – 5.2Trade and other receivables2 289.0 142.5 21.2 16.4 106.8 (13.5) 562.4Total financial and insurance assets 3,068.6 206.5 23.5 32.4 109.1 (35.0) 3,405.1

1 Comprises insurance debtors, Medicare rebate and Risk Equalisation Trust Fund recoveries detailed in Section 3.0.2.2 Comprises trade receivables, other receivables and service concession receivables detailed in Section 3.0.1.

The carrying amount of financial and insurance assets of £3,620.1m (2014: £3,405.1m) and cash, cash equivalents and restricted assets of £1,250.0m (2014: £1,240.8m) included on the Group balance sheet represents the maximum credit exposure.

The movement in the allowance for impairment in respect of financial and insurance assets during the year was as follows:

2015 £m

2014 £m

At beginning of year 34.9 29.2Impairment loss recognised / (released) 5.0 (0.2)Additions through business combinations – 12.0Bad debt provision released in year (4.5) (5.2)Foreign exchange (1.9) (0.9)At end of year 33.5 34.9

The Group believes no impairment allowance is necessary in respect of financial assets not past due date.

The Group considers notified disputes, significant changes in the counterparty’s financial position and collection experience in determining which assets should be impaired. The credit quality of receivables is managed at a local business unit level with uncollectable amounts being impaired when necessary.

Assets pledged as security include £55.9m (2014: £53.2m) of cash held in restricted access deposits.

The Group holds notional cash pools with banks under which overdrafts can net with cash balances held by other members of the Group. In these circumstances, where the criteria of IAS 32 are met, cash balances and overdrafts are offset in the statement of financial position. The amounts offset total £207.5m (2014: £97.4m).

The Group enters into derivative transactions under International Swaps and Derivative Association (ISDA) master netting agreements. Under such agreements the amounts owed to each counterparty may be offset as a single amount in certain circumstances. The Group does not offset these balances in the Statement of Financial Position as the right of offset is enforceable only on the occurrence of a future event such as a default.

Page 118: Longer, healthier, happier lives

116Bupa Annual Report 2015

Notes to the Financial StatementsNotes to the Financial

Statements (continued)

for the year ended 31 December 2015

5.4.4Liquidity risk

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

The Group’s main source of short-term funding is via an £800.0m revolving credit facility which was undrawn at 31 December 2015, with the exception of £6.4m of outstanding letters of credit for general business purposes. The bank facility matures in 2020.

The Group monitors funding risk as well as compliance with existing financial covenants within the banking arrangements. There were no concerns regarding bank covenant coverage in 2015 and that position is not expected to change in the foreseeable future.

The Group enjoys a strong liquidity position and adheres to strict liquidity management policies as set by the Treasury and Investment Committee as well as adhering to certain liquidity parameters, as defined by the PRA for the Group’s regulated entities in the UK and local equivalent authorities for the Group’s foreign operations.

Liquidity is managed by currency and by considering the segregation of accounts required for regulatory purposes; short-term operational working capital requirements are met by cash in hand and committed bank facilities.

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

Sub- ordinated liabilities

£m

Other interest bearing liabilities

£m

Provisions under insurance

contracts issued £m

Other liabilities under insurance contracts issued

£m

Tradeand other payables1

£m

Derivative liabilities

£m Total

£m

20152016 (45.2) (452.8) (2,227.3) (72.1) (1,401.7) (22.1) (4,221.2)2017 (45.2) (57.2) (0.2) – (7.3) (1.5) (111.4)2018 (45.2) (53.9) (0.2) – (4.4) (8.8) (112.5)2019 (45.2) (36.8) (0.3) – (1.2) – (83.5)2020 (370.2) (419.2) (0.4) – (1.0) – (790.8)2021–2025 (610.3) (128.8) (6.1) – (3.9) – (749.1)After 2025 – (241.2) (20.4) – (0.9) – (262.5)Total (1,161.3) (1,389.9) (2,254.9) (72.1) (1,420.4) (32.4) (6,331.0)Carrying value in the Statement

of Financial Position (919.4) (1,154.7) (2,255.1) (72.1) (1,420.5) (32.4) (5,854.2)

20142015 (45.2) (112.5) (2,182.5) (57.6) (1,220.5) (3.8) (3,622.1)2016 (45.2) (400.0) (0.4) – (6.1) – (451.7)2017 (45.2) (42.7) (0.2) – (4.6) – (92.7)2018 (45.2) (40.9) (0.3) – (0.4) (11.0) (97.8)2019 (45.2) (22.7) (0.3) – (0.4) (62.1) (130.7)2020–2024 (983.2) (472.6) (8.1) – (1.8) – (1,465.7)After 2024 – (349.4) (17.1) – (1.7) – (368.2)Total (1,209.2) (1,440.8) (2,208.9) (57.6) (1,235.5) (76.9) (6,228.9)Carrying value in the Statement

of Financial Position (929.6) (1,154.6) (2,208.9) (57.6) (1,235.5) (76.9) (5,663.1)

1 Comprised of trade payables, other payables, accommodation bond liabilities and accruals detailed in Section 3.0.6.

The total liability is split by remaining duration in proportion to the cash flows expected to arise during that period. Interest payments are included in the cash flows for subordinated liabilities and other interest bearing liabilities.

Page 119: Longer, healthier, happier lives

117Bupa Annual Report 2015

Notes to the Financial Statements

Maturity profile of financial assetsThe maturity profile of financial assets as at 31 December 2015 and 2014, which are available to fund the repayment of liabilities as they crystallise, is as follows:

Cash andcash

equivalents£m

Depositswith creditinstitutions

£m

Government

debtsecurities

£m

Corporatedebt

securities and other loans

£m

Pooled investment

funds£m

Total£m

20152016 1,194.1 1,195.2 24.2 126.0 47.8 2,587.32017 – 90.9 2.1 110.4 3.9 207.32018 – 88.3 2.0 30.7 2.0 123.02019 – 35.1 0.1 24.7 3.6 63.52020 – 24.8 14.0 50.9 40.9 130.62021–2025 – 2.8 27.2 104.5 35.7 170.2

After 2025 – – 0.1 88.4 12.0 100.5Total 1,194.1 1,437.1 69.7 535.6 145.9 3,382.4

20142015 1,187.5 969.2 25.0 225.0 34.7 2,441.42016 – 169.5 79.3 101.4 195.8 546.02017 – – 7.1 39.3 – 46.42018 – – 1.2 14.2 – 15.42019 – – 0.5 10.7 – 11.22020–2024 – – 17.4 12.4 – 29.8After 2024 – – 85.2 – 85.2Total 1,187.5 1,138.7 130.5 488.2 230.5 3,175.4

6.0Related party transactions

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

All transactions with related parties are conducted on an arm’s length basis.

Where the Company enters into financial guarantee contracts to guarantee the indebtedness of other companies within the Group, the Company considers these to be insurance arrangements, and accounts for them as such. In this respect, provision for expected claims is made on an incurred basis.

There were no material transactions during the year with any related parties, as defined by IAS 24, other than those disclosed in this section.

(i) Transactions with key management personnelThe key management personnel are the Group’s Executive and Non-Executive Directors and includes the Managing Directors of the Group’s Market Units. No director had any material interest in any contracts with Group companies at 31 December 2015 (2014: £nil) or at any time during the year. The remuneration of the Group’s Executive and Non-Executive Directors is disclosed on pages 51-60.

The total remuneration of the Market Unit Managing Directors is as follows:

2015 £m

2014 £m

Short-term employee benefits 4.6 4.7Long-term incentive plan 0.9 1.3Post employment benefits 0.6 0.6Total 6.1 6.6

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

(ii) Transactions in relation to the non-registered pension arrangementsThe Company has made pension commitments to certain current and former Executive Directors and key management personnel through a non-registered pension arrangement which mirrors the terms of The Bupa Pension Scheme (see Section 3.6). These unfunded benefits are governed by The Law Debenture Pension Trust Corporation Plc who are the Trustee of the non-registered pension arrangement, and are secured by a charge over £45.1m (2014: £40.9m) of cash deposits (see Section 3.0.4). The increase in the charge of £4.2m during 2015 mainly reflects changes in market conditions and market related changes in the underlying actuarial assumptions.

Page 120: Longer, healthier, happier lives

118Bupa Annual Report 2015

Notes to the Financial StatementsNotes to the Financial

Statements (continued)

for the year ended 31 December 2015

6.1Commitments and

contingencies

Commitments and contingencies in briefA commitment is future expenditure that is committed to as at 31 December 2015. 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 leasesThe total value of future non-cancellable operating lease rentals is payable as follows:

2015£m

2014£m

Less than one year 117.0 121.3Between one and five years 354.2 390.7More than five years 630.6 610.2Total operating leases 1,101.8 1,122.2

The Group leases a number of properties under operating leases. The leases typically run for a period between 10 and 25 years, with an option to renew the lease after that date. Lease payments are reviewed regularly in accordance with the terms and conditions of the individual lease agreements. None of these leases include contingent rentals.

Some of the leased properties have been sub-let by the Group. Both the leased properties and the sub-leases expire between 2019 and 2024. Sub-lease receipts of £0.8m (2014: £0.7m) are expected to be received during the next financial year. The Group has an unoccupied property provision of £2.9m (2014: £4.6m) in respect of these leases (see Section 3.5). The Group leases out some of its investment properties as a lessor, see Section 3.3 for details.

(ii) Capital commitmentsCapital expenditure for the Group contracted at 31 December 2015 but for which no provision has been made in the financial statements, amounted to £141.6m (2014: £187.6m), of which £99.8m (2014: £135.6m) related to property, plant and equipment and £41.8m (2014: £52.0m) related to investment property.

(iii) Contingent assets and contingent liabilitiesThe Group currently has no contingent assets.

The Group has contingent liabilities arising in the ordinary course of business, including losses which might arise from litigation, from which it is anticipated that the likelihood of any material unprovided liabilities arising is remote.

(iv) Pensions contributionsThe Group has an obligation to make a special contribution to the Bupa Pension Scheme amounting to £40m for the year ending 31 December 2016.

Page 121: Longer, healthier, happier lives

119Bupa Annual Report 2015

Company Primary Statements and Associated Notes

7.0 Company Primary Statements

and Associated Notes

Company primary statements and associated notes in briefThis section consists of the Company’s primary statements including Statement of Financial Position, Statement of Cash Flows and Statement of Changes in Equity. Sections 7.1 to 7.11 form the associated notes to the Company financial statements.

The Company accounting policies are aligned with those of the Group, described at Sections 2 to 6.

Statement of financial positionas at 31 December 2015

Section2015

£m2014

£m

Non-current assetsIntangible assets 7.1 29.8 24.6 Property, plant and equipment 7.2 25.1 25.3 Investment in subsidiary companies 7.11 200.1 200.1 Investment property 7.3 0.2 – Other receivables 7.6 0.3 0.3 Post employment benefit assets 7.4 408.4 348.6

663.9 598.9

Current assetsTrade and other receivables 7.6 58.5 133.3 Current taxation asset 0.2 – Cash and cash equivalents 8.5 1.0

67.2 134.3 Total assets 731.1 733.2

Non-current liabilitiesPost employment benefit net liabilities 7.4 (51.3) (54.6)Provisions for liabilities and charges 7.5 (5.4) (11.2)Deferred taxation liabilities 7.8 (56.5) (48.9)Other payables 7.6 (7.4) (9.0)

(120.6) (123.7)

Current liabilitiesProvisions for liabilities and charges 7.5 (5.1) (4.1)Trade and other payables 7.6 (76.9) (155.1)Current taxation liabilities – (0.2)

(82.0) (159.4)Total liabilities (202.6) (283.1) Net assets 528.5 450.1

EquityIncome and expenditure reserve 528.1 449.7 Foreign exchange translation reserve 0.4 0.4 Total equity 528.5 450.1

Approved by the Board of Directors and signed on its behalf on 2 March 2016 by

Lord Leitch Evelyn BourkeChairman Chief Financial Officer

Sections 7.1 to 7.11 form part of these financial statements.

Page 122: Longer, healthier, happier lives

120Bupa Annual Report 2015

Company Primary Statements and Associated NotesNotes to the Financial

Statements (continued)

for the year ended 31 December 2015

Income statement for the year ended 31 December 2015

The profit for the financial year recorded within the accounts of the Company, The British United Provident Association Limited (Bupa), is £67.3m (2014: £64.0m). 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 2,067 (2014: 1,366).

Statement of cash flowsfor the year ended 31 December 2015

2015 £m

2014 £m

Operating activities Profit before taxation expense 50.7 49.9

Adjustments for:Net financial expense / (income) 0.2 (0.2)Depreciation, amortisation and impairment 17.2 17.4

Other non-cash items – 41.7

Changes in working capital and provisions:Changes in net pension asset / liability 7.4 (52.2) (41.2)(Decrease) / increase in provisions for liabilities and charges (4.8) 0.1 Decrease / (increase) in trade and other receivables, and other assets 7.6 74.8 (54.7)(Decrease) / increase in trade and other payables, and other liabilities (56.0) 1.4 Cash generated from operations 29.9 14.4

Cash flow from investing activitiesPurchase of intangible assets 7.1 (32.3) (21.1)Proceeds from sale of intangible assets 7.1 15.0 10.7 Purchase of property, plant and equipment 7.2 (4.8) (5.4)Proceeds from sale of property, plant and equipment 7.2 – 1.0 Interest received 0.1 0.4

Net cash generated used in investing activities (22.0) (14.4)

Cash flow from financing activitiesInterest paid (0.4) (0.1)Net cash used in financing activities (0.4) (0.1)

Net increase / (decrease) in cash and cash equivalents 7.5 (0.1)Cash and cash equivalents at beginning of year 1.0 1.1 Cash and cash equivalents at end of year 8.5 1.0

Sections 7.1 to 7.11 form part of these financial statements.

Page 123: Longer, healthier, happier lives

121Bupa Annual Report 2015

Company Primary Statements and Associated Notes

Statement of changes in equityfor the year ended 31 December 2015

Section

Income and expenditure

reserve £m

Foreign exchange

translation reserve

£m

Total equity

£m

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

Other comprehensive income: Remeasurement gain on pension scheme 7.4 11.0 – 11.0 Taxation charge on income and expenses recognised directly

in other comprehensive income 7.8 0.1 – 0.1 Other comprehensive income for the year, net of taxation 11.1 – 11.1

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

2014At beginning of year 244.8 0.4 245.2 Profit for the financial year 64.0 – 64.0

Other comprehensive (expense) / income: Remeasurement gain on pension scheme 7.4 175.7 – 175.7 Taxation charge on income and expenses recognised directly

in other comprehensive income 7.8 (34.8) – (34.8)Other comprehensive income for the year, net of taxation 140.9 – 140.9

Total comprehensive income for the year 204.9 – 204.9 At end of year 449.7 0.4 450.1

Sections 7.1 to 7.11 form part of these financial statements.

Page 124: Longer, healthier, happier lives

122Bupa Annual Report 2015

Company Primary Statements and Associated NotesNotes to the Financial

Statements (continued)

for the year ended 31 December 2015

7.1Intangible assets

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

Intangible assets – Computer software 2015

£m2014

£m

CostAt beginning of year 74.6 64.2Additions 32.3 21.1Disposals (15.0) (10.7)Other (1.9) –At 31 December 2015 90.0 74.6

Amortisation and impairment lossAt beginning of year 50.0 40.3Amortisation for year 10.2 9.7At 31 December 2015 60.2 50.0

Net book value at end of year 29.8 24.6Net book value at beginning of year 24.6 23.9

7.2Property, plant and equipment

Property, plant and equipment in briefProperty, plant and equipment are the physical assets utilised by the Company to carry out business activities and generate revenues and profits. Most of the assets held relate to office buildings, IT and other office equipment.

Property, plant and equipment2015 2014

Leasehold property

£mEquipment

£mTotal

£m

Leasehold property

£mEquipment

£mTotal

£m

Cost or valuationAt beginning of year 18.8 47.5 66.3 18.3 44.3 62.6Additions 0.2 4.6 4.8 0.5 4.9 5.4Disposals – – – – (1.7) (1.7)Other – 2.0 2.0 – – –At end of year 19.0 54.1 73.1 18.8 47.5 66.3

Depreciation and impairment lossAt beginning of year 10.5 30.5 41.0 8.4 25.6 34.0Depreciation charge for year 1.6 5.4 7.0 2.1 5.6 7.7Disposals – – – – (0.7) (0.7)At end of year 12.1 35.9 48.0 10.5 30.5 41.0

Net book value at end of year 6.9 18.2 25.1 8.3 17.0 25.3Net book value at beginning of year 8.3 17.0 25.3 9.9 18.7 28.6

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

Page 125: Longer, healthier, happier lives

123Bupa Annual Report 2015

Company Primary Statements and Associated Notes

7.3Investment properties

Investment properties are physical assets that are not occupied by the Group and are leased to third parties to generate rental income.

There is currently only one office building recognised as an investment property at £0.2m (2014: £nil).

7.4Post employment

benefits

Post employment benefits in briefThe 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 closed to new entrants from 1 October 2002. The principal defined contribution pension scheme is The Bupa Retirement Savings Plan.

The Company is the sponsoring employer for The Bupa Pension Scheme, the unfunded pension scheme and post retirement medical benefit scheme described in Section 3.6. The actuarial assumptions underlying the valuation of obligations are detailed in Section 3.6.2.

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

Pension schemesPost retirement medical

benefit scheme Total

Note2015

£m2014

£m2015

£m2014

£m2015

£m2014

£m

Present value of funded obligations (ii) (1,262.2) (1,288.9) – – (1,262.2) (1,288.9)Fair value of scheme assets (iii) 1,670.6 1,637.5 – – 1,670.6 1,637.5 Net assets of funded schemes 408.4 348.6 – – 408.4 348.6 Present value of unfunded obligations (ii) (42.8) (43.2) (8.5) (11.4) (51.3) (54.6)Net recognised assets / (liabilities) 365.6 305.4 (8.5) (11.4) 357.1 294.0

Represented on the Statement of Financial Position as:Net assets 408.4 348.6Net liabilities (51.3) (54.6)Net recognised assets / (liabilities) 357.1 294.0

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

Pension schemesPost retirement medical

benefit scheme Total

2015£m

2014£m

2015£m

2014£m

2015£m

2014£m

At beginning of year 1,332.2 1,198.5 11.4 11.0 1,343.6 1,209.5Current service cost 8.5 12.5 – – 8.5 12.5Interest on obligations 49.3 55.6 0.4 0.5 49.7 56.1Contributions by employees 0.1 0.1 – – 0.1 0.1(Gains) / losses arising from changes to financial assumptions (41.7) 124.2 – – (41.7) 124.2Gains arising from changes to experience assumptions (17.2) (14.2) – – (17.2) (14.2)Losses / (gains) arising from changes to demographic assumptions 6.2 (16.4) (2.8) 0.3 3.4 (16.1)Benefits paid (32.4) (28.2) (0.5) (0.4) (32.9) (28.6)At end of year 1,305.0 1,332.1 8.5 11.4 1,313.5 1,343.5

Page 126: Longer, healthier, happier lives

124Bupa Annual Report 2015

Company Primary Statements and Associated NotesNotes to the Financial

Statements (continued)

for the year ended 31 December 2015

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

2015£m

2014£m

At beginning of year 1,637.5 1,286.6Interest income 61.0 60.1Return on assets excluding interest income (44.5) 269.6Contributions by employer 48.0 49.5Contributions by employees 0.1 0.1Administrative expenses (1.5) (1.5)Benefits paid (30.0) (26.9)At 31 December 2015 1,670.6 1,637.5

The market value of the assets of the funded scheme is as follows:Debt instruments 587.7 –Gilts 522.5 764.6Corporate bonds 450.1 314.8Cash / Other assets 67.9 347.5Equities 42.4 210.6Total market value of the assets of the funded scheme 1,670.6 1,637.5

All assets have a quoted market price.

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

2015£m

2014£m

Current service cost 8.5 12.5Net interest on defined benefit liability / asset (11.3) (4.0)Administrative expenses 1.5 1.5 Total amount charged to Income Statement (1.3) 10.0

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

2015£m

2014£m

Actual return less return on assets included within profit and loss 44.5 (269.6)Loss arising from changes to financial assumptions (41.7) 124.2 Gain arising from changes to experience assumptions (17.2) (14.2)Gain arising from changes to demographic assumptions 3.4 (16.1)Total remeasurement losses (gains credited) / charged directly to equity (11.0) (175.7)

The cumulative amount of actuarial losses recognised directly in equity is £0.2m as at 31 December 2015 (2014: £10.8m).

Page 127: Longer, healthier, happier lives

125Bupa Annual Report 2015

Company Primary Statements and Associated Notes

7.5Provisions for liabilities

and charges

Provisions for liabilities and charges in briefProvisions 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.

Provisions for liabilities and charges

Insurance £m

Unoccupied property

£mOther

£mTotal

£m

At 1 January 2015 14.1 1.1 0.1 15.3Charge for year 7.9 – (0.1) 7.8Released in year – (0.3) – (0.3)Utilised in year (12.3) – – (12.3)At 31 December 2015 9.7 0.8 – 10.5

Non-current 4.7 0.7 – 5.4Current 5.0 0.1 – 5.1Total provisions for liabilities and charges 9.7 0.8 – 10.5

7.6Working capital

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

7.6.1 Trade and other receivables2015

£m2014

£m

Non-currentPrepayments 0.3 0.3Total non-current other receivables 0.3 0.3

CurrentAmounts owed by subsidiary companies 41.5 116.9Other receivables 0.7 0.5Prepayments 16.3 15.9Total current trade and other receivables 58.5 133.3

Total trade and other receivables 58.8 133.6

7.6.2 Trade and other payables2015

£m2014

£m

Non-currentAmounts owed to subsidiary companies 0.3 0.3Accruals 7.1 8.7Total non-current trade and other payables 7.4 9.0

CurrentAmounts owed to subsidiary companies 19.8 86.2Other payables 6.5 10.2Accruals 50.6 58.7Total current trade and other payables 76.9 155.1 Total trade and other payables 84.3 164.1

Page 128: Longer, healthier, happier lives

126Bupa Annual Report 2015

Company Primary Statements and Associated NotesNotes to the Financial

Statements (continued)

for the year ended 31 December 2015

7.7Risk management

Risk management in briefThe 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 Section 5.4.

The risks faced by the Company have been assessed as part of the Group’s ongoing risk management processes, a summary of these risks are outlined below:

Risk type Summary of risk assessment

Insurance risk The Company is not exposed to insurance risk

Market risk The Company is not materially exposed to foreign exchange or interest rate risk

Credit risk The maximum credit risk exposure of the Company is £9.2m (2014: £1.5m). The Company believes amounts owed to it by subsidiary companies carry no credit risk

Liquidity risk The contractual maturity of financial liabilities, held by the Company, fall due within one year

7.8Deferred taxation assets

and liabilities

Deferred taxation assets and liabilities in briefDeferred 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 liabilitiesDeferred taxation assets and liabilities are attributable to the following:

Assets Liabilities Net

2015 £m

2014 £m

2015 £m

2014 £m

2015 £m

2014 £m

Accelerated capital allowances 2.5 2.5 – – 2.5 2.5Post employment benefit liability – – (64.5) (58.6) (64.5) (58.6)Revaluation of properties to fair value 0.2 0.1 – – 0.2 0.1Employee benefits (other than post employment) 2.8 2.9 – – 2.8 2.9Provisions 2.1 4.1 – – 2.1 4.1Other 0.4 0.1 – – 0.4 0.1Net deferred taxation asset / (liability) 8.0 9.7 (64.5) (58.6) (56.5) (48.9)

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.

Page 129: Longer, healthier, happier lives

127Bupa Annual Report 2015

Company Primary Statements and Associated Notes

Movement in net deferred taxation assets / (liabilities)

At beginning of year

£m

Recognised in Income

Statement £m

Recognised in Other

Compre- hensive Income

£m

At end of year

£m

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

2014Accelerated capital allowances 1.7 0.8 – 2.5Post employment benefit liability (15.6) (8.2) (34.8) (58.6)Revaluation of properties to fair value – 0.1 – 0.1Employee benefits (other than post employment) 2.6 0.3 – 2.9Provisions 3.6 0.5 – 4.1Other 0.1 – – 0.1Total (7.6) (6.5) (34.8) (48.9)

7.9Related party transactions

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

The Company has a related party relationship with its key management personnel and with its subsidiary companies (see Section 7.11).

(i) Transactions with key management personnelThe key management personnel for the Company are the same as for the Group. These transactions are disclosed in Section 6.0.

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

(ii) Transactions in relation to the non-registered pension arrangementsThese transactions are disclosed in Section 6.0.

(iii) Transactions and balances with subsidiary companies Transactions during the year

Balance at 31 December

2015 £m

2014 £m

2015 £m

2014 £m

Income StatementManagement charges received 229.8 202.6Interest income 0.1 0.4Interest expense (0.1) (0.2)Income received 2.5 2.1Expenses paid (including rental expense of £5.6m (2014: £5.6m)) (7.6) (7.4)Dividends received 138.3 135.8

Statement of financial position Amounts owed by subsidiary companies (75.4) 56.8 41.5 116.9Amounts owed to subsidiary companies 66.4 (20.5) (19.8) (86.2)Loans from subsidiary companies 0.2 – (0.3) (0.5)

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.

Page 130: Longer, healthier, happier lives

128Bupa Annual Report 2015

Company Primary Statements and Associated NotesNotes to the Financial

Statements (continued)

for the year ended 31 December 2015

7.10Commitments and

contingencies

Commitments and contingencies in briefA commitment is future expenditure that is committed to as at 31 December 2015. These commitments primarily consist of contracted capital expenditure.

Contingent liabilities include bank loan and bond issue guarantees.

(i) CommitmentsCapital expenditure for the Company contracted as at 31 December 2015 but for which no provision has been made in the financial statements amounted to £0.2m (2014: £0.1m).

(ii) Operating leasesThe Company has £51.6m of operating lease obligations (2014: £57.4m).

(iii) Pensions contributionsThe Group has an obligation to make a special contribution to the Bupa Pension Scheme amounting to £40.0m for the year ending 31 December 2016.

In addition, Bupa Finance plc has entered into a legally binding and irrevocable guarantee for the benefit of the Trustees of The Bupa Pension Scheme in respect of these payments.

(iv) Contingent assets and liabilitiesThe Company has given guarantees in respect of the £350.0m bond issued in 2014 by Bupa Finance plc.

The Company is party to an £800.0m revolving credit facility, together with various other companies within the Group. The revolving credit facility was drawn down by £nil at 31 December 2015 (2014: £nil). There are £6.4m of outstanding letters of credit required for general business purposes. The Company has joint and several liability for all obligations under the agreement.

7.11Investment in subsidiaries

Investment in subsidiaries in briefBelow is a summary of the principal investments in subsidiaries held by the Company.

Carrying value of investment in subsidiariesInvestments in subsidiary companies are carried at cost less impairment in the Company’s accounts. Dividends received from subsidiaries are recognised in the income statement when the right to receive the dividend is established.

As at 31 December 2015, the Company held investments in subsidiaries of £200.1m (2014: £200.1m).

In accordance with Section 409 of the Companies Act 2006 a full list of subsidiaries, partnerships, associates, joint ventures and joint arrangements, the country of incorporation and the effective percentage of equity owned, as at 31 December 2015 are disclosed below. Unless otherwise stated the share capital disclosed comprises ordinary shares which are indirectly held by the Company.

Fully owned subsidiariesAllied Medical Practices Guild Limited Hong KongAltai Investments Limited British Virgin IslandsAmedex Insurance Company (Bermuda)

Limited BermudaAmedex Medical Group, S.R.L Dominican RepublicAmedex Services Ltd. (St Kitts) Saint Kitts and NevisANS 2003 Limited United KingdomANS Limited United KingdomAqua Dental Spa Limited United KingdomAustralia Fair Dental Care Pty Ltd AustraliaBede Village Management Limited United KingdomBelmont Care Limited United KingdomBerkshire Group Limited British Virgin IslandsBHS (Holdings) 2006 Limited United KingdomBI Healthcare Holdings BV NetherlandsBridge Health Investments Limited United KingdomBupa (Asia) Limited Hong KongBupa Aged Care Australasia Pty Limited AustraliaBupa Aged Healthcare Holdings Pty Limited Australia

Bupa Agedcare Funds Management Limited AustraliaBupa Agedcare Group Limited AustraliaBupa Agedcare Limited AustraliaBupa Agedcare Management Pty Limited AustraliaBupa Agedcare No.2 Trust AustraliaBupa Agedcare No.3 Trust AustraliaBupa Agedcare No.3A Trust AustraliaBupa Agedcare Trust AustraliaBupa Asia Pacific Pty Limited AustraliaBupa Australia Health Pty Limited AustraliaBupa Australia Healthcare Holdings Pty

Limited AustraliaBupa Australia Healthcare Pty Limited AustraliaBupa Australia Holdings Pty Limited AustraliaBupa Australia Pty Limited AustraliaBupa Care Homes (AKW) Limited United KingdomBupa Care Homes (ANS) Limited United KingdomBupa Care Homes (Bedfordshire) Limited United KingdomBupa Care Homes (BNH) Limited United KingdomBupa Care Homes (BNHP) Limited (i) United Kingdom

Page 131: Longer, healthier, happier lives

129Bupa Annual Report 2015

Company Primary Statements and Associated Notes

Bupa Care Homes (Carrick) Limited United KingdomBupa Care Homes (CFCHomes) Limited United KingdomBupa Care Homes (CFG) plc United KingdomBupa Care Homes (CFHCare) Limited United KingdomBupa Care Homes (Developments) Limited United KingdomBupa Care Homes (GL) Limited United KingdomBupa Care Homes (HH Bradford) Limited United KingdomBupa Care Homes (HH Hull) Limited United KingdomBupa Care Homes (HH Leeds) Limited United KingdomBupa Care Homes (HH Northumberland)

Limited United KingdomBupa Care Homes (HH Scunthorpe) Limited United KingdomBupa Care Homes (HH) Limited United KingdomBupa Care Homes (Partnerships) Limited United KingdomBupa Care Homes Group Limited United KingdomBupa Care Services Limited United KingdomBupa Care Services NZ Limited New ZealandBupa Care Services Pty Limited AustraliaBupa Consulting (Beijing) Co. Ltd. ChinaBupa Denmark Services A/S DenmarkBupa Dental Corporation Limited AustraliaBupa Dental Services Limited United KingdomBupa Dominicana, S.A. (Dominican Republic) Dominican RepublicBupa Egypt Insurance Bupa Global S.A.E. EgyptBupa Egypt Services LLC EgyptBupa Europe Investments Limited (i) United KingdomBupa Europe Limited United KingdomBupa Finance plc (ii) United KingdomBupa Financial Investments Limited (i) United KingdomBupa Global Holdings Limited United KingdomBupa Global Middle East (DIFC) Limited DubaiBupa Guatemala, Compania de Seguros, S.A. GuatemalaBupa Guernsey No.2 Limited GuernseyBupa Health at Work Limited (i) United KingdomBupa Health Care Asia Pte Ltd SingaporeBupa Health Dialog Pty Limited AustraliaBupa Healthcare Services Limited United KingdomBupa Holdings (Guernsey) Limited GuernseyBupa Holdings (Jersey) Limited (i) United KingdomBupa Holdings Limited Partnership AustraliaBupa Holdings Overseas Cooperatief B.A. NetherlandsBupa Home Healthcare Group Limited United KingdomBupa Home Healthcare Limited United KingdomBupa Innovations Pty Ltd Australia Bupa Insurance (Bolivia) S.A BoliviaBupa Insurance Company United StatesBupa Insurance Limited United KingdomBupa Insurance Services Limited United KingdomBupa International Limited Hong KongBupa Investment Corporation, Inc. United StatesBupa Investments Limited United KingdomBupa Investments Overseas Limited United KingdomBupa LeaseCo Holdings Limited GuernseyBupa LeaseCo. (Guernsey) Limited GuernseyBupa Limited (i) United KingdomBupa Limited (HK) Hong KongBupa Malta Investments No. 1 Limited (i) GibraltarBupa Malta Investments No. 2 Limited (i) GibraltarBupa Medical Pty Limited Australia

Bupa Medical Services Pty Limited AustraliaBupa Mexico, Compania de Seguros, S.A. de

C.V. MexicoBupa Occupational Health Limited United KingdomBupa Optical Pty Ltd AustraliaBupa Panama S.A. PanamaBupa Pension Scheme Trustees Limited (i) United KingdomBupa Retirement Villages Limited New ZealandBupa Secretaries Limited (i) United KingdomBupa Servicios Administrativos de Salud, S. de

R.L. de C.V. MexicoBupa Servicios de Evaluacion Medica, S. de

R.L. de C.V. MexicoBupa Servicios de Gestao em Saude Ltda Brazil Bupa Servicios Ejecutivos de Salud, S. de R.L.

de C.V. MexicoBupa Singapore Holdings Pte Ltd SingaporeBupa Treasury Limited United KingdomBupa Trustees Limited United KingdomBupa U.S. Holdings, Inc. United StatesBupa Wellness Group Limited (i) United KingdomBupa Wellness Pty Limited AustraliaBupa Worldwide Corporation United StatesCAID Holdings Pty Limited AustraliaCAID Pty Limited AustraliaCalverguild Limited (i) United KingdomCase Specialist Limited Hong KongCentrum Medyczne Diagnostyka sp. z o.o. PolandCentrum Opieki Medycznej Comed Sp. Z.o.o. PolandCranbrook Dental Practice Limited United KingdomCromwell Health Group Limited United KingdomDB Health Services Limited Hong KongDC Holdings WA Pty Ltd AustraliaDCA Agedcare No.2 Limited AustraliaDCA Services Pty Limited AustraliaDental Care Network Pty Ltd AustraliaDental Corporation (NZ) Limited New ZealandDental Corporation Australia Fair Pty Ltd AustraliaDental Corporation Cox Pty Ltd AustraliaDental Corporation Gerber Pty Ltd AustraliaDental Corporation Holdings Limited AustraliaDental Corporation Levas Pty Ltd AustraliaDental Corporation Petrie Pty Ltd AustraliaDental Corporation Pty Ltd AustraliaDiagnostic-Med. Centrum Diagnostyki

Radiologicznej Sp. z o.o. PolandDr Chris Hardwicke Pty Ltd AustraliaDynamic People Group Limited British Virgin IslandsEbbgate Nursing Homes (London) Limited (i) United KingdomEbbgate Nursing Homes Limited (i) United KingdomElba 1 Sp. z.o.o. PolandEndoterapia Sp. z.o.o. PolandEspecializada Y Primaria L’Horta-Manises, S.A. SpainEuro-Clinic Sp. z.o.o Poland Euro-Clinic Sp. z.o.o Sp. k Poland Gerber Dental Group Pty Ltd AustraliaGHC Holdings Limited Hong KongGlobalRx Limited Hong KongGoldsborough Estates Limited United Kingdom

Page 132: Longer, healthier, happier lives

130Bupa Annual Report 2015

Company Primary Statements and Associated NotesNotes to the Financial

Statements (continued)

for the year ended 31 December 2015

Great Option Limited Hong KongGrupo Bupa Sanitas Chile Uno, SpA ChileGrupo Bupa Sanitas Chile, S.L.U. SpainGrupo Bupa Sanitas S.L. SpainHealth Dialog UK Limited (i) United KingdomHealthCare Opportunities Limited British Virgin IslandsHealthcare Property Funds Pty Limited AustraliaIHI danmark A/S DenmarkIHI Holding A/S DenmarkIn Store Dental Limited United KingdomJadeast Limited Hong KongJadefairs International Limited Hong KongJadison Investment Limited Hong KongJadway International Limited Hong KongLarry Benge Pty Limited AustraliaLMG Forsakrings AB SwedenLMG Forsakrings AB Spolka Akcyjna Oddzial

w Polsce PolandLux Med Lodz Sp. z.o.o. PolandLUX MED Sp. z.o.o. PolandLUX-MED Investment Sp. A. PolandMarvellous Way Limited Hong KongMBF Holdings Pty Limited AustraliaMedical Services International Limited United KingdomMedicor Centrum Medyczne sp. z o.o. PolandMedicor sp.  z o.o. PolandMedika Uslugi Medyczne Sp. z.o.o. PolandMegafaith International Limited Hong KongMegamed Sp. z.o.o. PolandNormandy (Hong Kong) Limited British Virgin IslandsOccupational Health Care Limited United KingdomOnup Group Corporation United StatesPersonal Effectiveness Centre Limited United KingdomPlainprime Limited (i) United KingdomPortex Limited (i) Hong KongPORY 78 Sp. z.o.o. PolandQuality EAP (Macau) Limited MacaoQuality HealthCare Chinese Medicine Limited Hong KongQuality HealthCare Dental Services Limited Hong KongQuality HealthCare Hong Kong Limited Hong KongQuality HealthCare Limited British Virgin IslandsQuality HealthCare Medical Centre Limited Hong KongQuality HealthCare Medical Holdings Limited Hong KongQuality Healthcare Medical Services (Macau)

Limited (i) MacaoQuality HealthCare Medical Services Limited Hong KongQuality HealthCare Nursing Agency Limited Hong KongQuality HealthCare Physiotherapy Services

Limited Hong KongQuality HealthCare Professional Services

Limited Hong KongQuality HealthCare Psychological Services

Limited Hong KongQuality HealthCare Services Limited British Virgin IslandsQuality Healthcare TPA Services Limited Hong KongQuality Hospitals Hong Kong Limited Hong KongRichmond Care Villages (Property) Limited United KingdomRichmond Care Villages Holdings Limited United KingdomRichmond Coventry Limited United Kingdom

Richmond Letcombe Limited United KingdomRichmond Nantwich Developments Limited United KingdomRichmond Nantwich Limited United KingdomRichmond Nantwich Properties Limited United KingdomRichmond Northampton Limited United KingdomRichmond Northampton Management

Limited (i) United KingdomRichmond Painswick Management Company

Limited (i) United KingdomRichmond Villages Operations Limited United KingdomRimsey Pty Limited AustraliaSanitas Emision SL SpainSanitas Holding S.L. SpainSanitas Nuevos Negocios S.L. SpainSanitas Residencial de Navarra SL SpainSanitas Residencial Pais Vasco SA SpainSanitas Residencial SL SpainSanitas Sociedad Anonima de Hospitales

Sociedad Unipersonal (Spain) SpainSanitas Sociedad Limitada de

Diversificacion SL SpainScanlab Sp. z o.o. PolandScott Petrie (Dental) Pty Ltd AustraliaSGB Fortune MA Sp. z.o.o. Poland SGB Fortune MA Sp. z.o.o. Sp. K PolandSmile Centres Ltd United Kingdom Store Dental Care Limited United KingdomTCM Products Limited British Virgin IslandsTK-Medyk Sp. z.o.o PolandTOMOGRAF Sp. z.o.o. PolandU.S.A. Medical Services Corporation United StatesUltimate Smile Spa Ltd United KingdomUniversal Lane Limited British Virgin IslandsWatertight Investments Limited United Kingdom

Page 133: Longer, healthier, happier lives

131Bupa Annual Report 2015

Company Primary Statements and Associated Notes

Sociedad Medico Quirurgica De Antofagasta S.A.

Chile 66.5%

Sonorad I S.A. Chile 73.7%Sonorad II S.A. Chile 73.7%Sport Medica Spolka Akcyjna Poland 80.9%UK Care No 1 Limited (v) Guernsey 100.0%

AssociatesBupa Holdings (Thailand) Limited Thailand 49.0%Centro De Imagenes Medicas Avanzadas

San Jose S.A.Chile 35.6%

Endoterapia PFG Sp. z o.o. Poland 40.0%Forsikringens DataCenter A/S Denmark 33.3%Global Capital Health Insurance Agency

Limited (iii)Malta 6.7%

Highway to Health, Inc (USA) USA 49.0%HTH Re, Ltd USA 49.0%HTH Worldwide, LLC USA 49.0%Sociedad Instituto De Cardiologia Del Norte

LimitadaChile 33.3%

Vigil Monitoring Limited New Zealand

22.2%

Worldwide Insurance Services, LLC USA 49.0%

Joint VenturesBupa Arabia For Cooperative Insurance

CompanySaudi Arabia

26.3%

Bupa CSH Limited United Kingdom

50.0%

Bupa Middle East Holdings Two W.L.L. Bahrain 50.0%Bupa Middle East Holdings W.L.L. Bahrain 50.0%Bupa Middle East Limited Company E.C. Bahrain 50.0%Centrum Edukacyjne Medycyny Sportowej

Sp. z o.o.Poland 40.5%

Fulford Grange Medical Centre Limited (i) United Kingdom

50.0%

Max Bupa Health Insurance Company Limited

India 26.0%

Mobile Dental Pty Ltd Australia 49.0%Nazer Bupa Medical Equipment Company

Limited Saudi Arabia

50.0%

SmartGenRx Pty Ltd Australia 50.0%Torrejon Salud, S.A. Spain 50.0%

(i) Dormant entity(ii) Directly owned by Bupa Ltd(iii) Bupa holds non-profit participating B shares(iv) Bupa Ecuador is 99.999845% owned by the Group(v) These entities are consolidated but are 100% minority interest.

Please see section 8.0 for further detail.

Subsidiaries of which the group owns less than 100%

Anglolab S.A. Peru 51.6%Bupa Chile S.A. Chile 73.7%Bupa Chile Servicios Corporativos SpA Chile 73.7%Bupa Ecuador SA Compania de Seguros y

Reaseguros (iv)Ecuador 100.0%

Bupa Health Insurance (Thailand) Public Company Limited

Thailand 49.8%

Central Medical Diagnostic Centre Limited Hong Kong 70.0%Central Medical Laboratory Limited Hong Kong 70.0%Central MRI Centre Limited Hong Kong 70.0%Central PET/CT Scan Centre Limited Hong Kong 70.0%Centro De Diagostico Avanzado San Jose

S.A.Chile 50.9%

Centro Medico Antofagasta S.A. Chile 66.5%Centro Medico Clinica Renaca Limitada Chile 73.7%Centrum Diagnostyki Obrazowej Sp. z o.o. Poland 80.9%Centrum Edukacji Medycznej CEMED

Sp. z o.o.Poland 80.9%

Clinica Renaca S.A. Chile 61.2%Corporacion Medica De Arica S.A. Chile 50.9%Cruz Blanca Compania De Seguros De Vida

S.A.Chile 73.7%

Cruz Blanca Salud Internacional S.A. Chile 73.7%Cruz Blanca Salud Peru S.A.C. Peru 73.7%Desarrollo E Inversiones Medicas S.A. Chile 61.2%Examenes De Laboratorio S.A. Chile 73.7%Eurocredit Investment Fund 1 plc (v) Ireland 100.0%Healthcare Management Company Limited Thailand 21.3%Inmobiliaria Centro Medico Antofagasta S.A. Chile 66.5%Inmobiliaria Somequi S.A. Chile 66.5%Inmobiliaria Y Constructora CBS S.A. Chile 73.7%Integramedica Peru S.A.C. Peru 73.7%Integramedica S.A. Chile 73.7%Inversiones Clinicas CBS S.A. Chile 73.7%Inversiones Clinicas Pukara S.A. Chile 66.5%Isapre Cruz Blanca S.A. Chile 73.2%Lux Med Tabita Sp. z.o.o. Poland 88.0%Magodent Sp. z.o.o Poland 80.0%MediPeru S.A. Peru 73.7%Minor Health Enterprises Limited Thailand 61.8%Niepubliczny Zaklad Opieki Zdrowotnej

Przychodnia Lekarska “POGORZE” Sp. z.o.o.

Poland 88.1%

Panaholdings Investment Corporation S.A.C.

Peru 73.7%

Proisa Aseosorias S.A. Chile 73.7%Promotora De Salud S.A. Chile 39.2%Recaumed S.A. Chile 43.1%Sanitas S.A. De Seguros Spain 99.9%Service Medica Sp. z o.o. Poland 80.9%Servicios Clinicos Domiciliarios S.A. Chile 73.7%Servicios De Personal Clinico CBS Dos S.A. Chile 73.7%Servicios Y Abastecimiento A Clinicas S.A. Chile 66.5%Sociedad De Inversiones Pacasbra S.A. Chile 51.0%Sociedad De Resonancia Magnetica Del

Norte S.A.Chile 66.5%

Sociedad Medica Imageneologia Clinica Renaca Limitada

Chile 49.0%

Page 134: Longer, healthier, happier lives

132Bupa Annual Report 2015 Non-Controlling Interest

Notes to the Financial Statements (continued)

for the year ended 31 December 2015

8.0Non-controlling interests

Non-controlling interests in briefAdditional disclosure is provided for entities which are consolidated where the Company does not hold a 100% interest.

(i) Consolidation of entities in which the Group holds less than 50%Bupa Health Insurance (Thailand) plcThe directors have concluded that the Group controls Bupa Health Insurance (Thailand) plc and its holding companies; Bupa Holdings Thailand Ltd, Minor Health Enterprise Co Ltd and Health Care Management Co Ltd.

The Group holds 25% of the voting rights of Bupa Health Insurance (Thailand) Plc directly along with a 49% minority interest in the holding companies mentioned above, that in turn hold the other 75% of the voting rights. The articles of these holding companies require shareholder decisions to be unanimous, meaning that the holding companies are unable to exercise any actions without the Group’s agreement.

UK Care No 1 LimitedUK Care No 1 is a structured entity incorporated for the purposes of issuing the Group’s secured loans. The Group participates in the risks and rewards, but 100% minority interest is recognised due to the Group holding no share of the ownership.

Eurocredit Investment Fund 1 plcEurocredit Investment Fund is a structured entity set up for the purpose of investing in primary and secondary secured loans. Bupa is the only company contributing investment capital but the nominal share capital is held by a charitable trust. The Group participates in the risks and rewards, but 100% minority interest is recognised due to the Group holding no share of the ownership.

(ii) Subsidiary significant restrictionsThere are no significant restrictions on the subsidiaries ability to access or use the assets to settle the liabilities of the Group. The Group’s insurance entities are subject to local regulatory requirements.

(iii) Non-controlling interests (NCI)Set out below is summarised financial information for each subsidiary that has non-controlling interests material to the Group. The amounts disclosed for each subsidiary are before intercompany eliminations.

Bupa acquired 56.4% of the shares in Cruz Blanca Salud on 24 February 2014. As part of the transaction, the Group entered into a put and call option with the vendor for the sale of a further 17.3% of the shares in Cruz Blanca Salud. The effect of these options is to transfer the risks and rewards of the additional shareholding to Bupa and a 73.7% shareholding has been used for the purposes of acquisition accounting. Please see acquisitions in section 4.0 for further detail.

The Group owns 50% of the shareholding in Torrejón Salud S.A..

Torrejón50% NCI

Bupa Chile26.3% NCI

Summarised Statement of Financial Position2015

£m2014

£m2015

£m2014

£m

Current assets 41.9 46.7 109.9 111.0Current liabilities (32.5) (27.8) (172.4) (168.1)Current net assets / (liabilities) 9.4 18.9 (62.5) (57.1)Non-current assets 77.8 80.1 387.3 426.0Non-current liabilities (73.9) (78.7) (139.9) (160.1)Non-current net assets 3.9 1.4 247.4 265.9Net assets 13.3 20.3 184.9 208.8Accumulated NCI 6.7 10.2 48.6 54.3

Torrejón50% NCI

Bupa Chile26.3% NCI

Summarised Statement of Other Comprehensive Income2015

£m2014

£m2015

£m2014

£m

Revenue 71.0 73.4 656.3 531.3Profit for the period (5.9) 2.3 (1.9) 8.4Profit allocated to NCI (3.0) 1.1 (1.2) 3.8Dividends paid to NCI – – (1.4) (1.5)

Torrejón50% NCI

Bupa Chile26.3% NCI

Summarised cash flows2015

£m2014

£m2015

£m2014

£m

Cash flow from operating activities (3.3) (4.8) 0.4 18.8Cash flow from investing activities – – (16.6) (22.6)Cash flow from financing activities 2.5 7.4 5.0 (5.6)Net (decrease) / increase in cash and cash equivalents (0.8) 2.6 (11.2) (9.4)

Page 135: Longer, healthier, happier lives

133Bupa Annual Report 2015

Five Year Financial Summary

9.0Five year financial summary

Five year financial summary in briefThe five year financial summary provides a five year time summary in order to better understand trends.

2015£m

2014£m

2013 £m

2012£m

2011£m

Revenues – segmental analysisAustralia and New Zealand 3,648.4 3,759.6 3,791.8 3,554.0 3,252.8UK 2,857.8 2,711.2 2,573.5 2,528.8 2,506.2Spain and Latin America Domestic 1,824.5 1,842.5 1,363.5 1,190.8 1,212.6International Development Markets 551.1 506.7 377.3 227.3 244.2Bupa Global 947.5 958.7 953.0 872.0 795.9Net reclassifications to other expenses or financial income and expenses (0.9) (0.9) (0.4) 0.9 4.4Unallocated central revenues – – – 0.1 2.0Consolidated total revenues 9,828.4 9,777.8 9,058.7 8,373.9 8,018.1

Claims and expensesOperating expenses (including claims) (9,250.1) (9,143.9) (8,497.8) (7,840.4) (7,496.2)Impairment of goodwill (114.1) – (20.7) – (165.8)Impairment of other intangible assets arising on business combinations – (0.7) (12.8) – (133.7)Other income and charges (40.6) 12.9 (7.1) (3.2) (22.9)Total claims and expenses (9,404.8) (9,131.7) (8,538.4) (7,843.6) (7,818.6)

Profit before financial income and expense 423.6 646.1 520.3 530.3 199.5Financial expense and income (49.3) (36.9) (5.9) 54.8 20.5Profit before taxation expense 374.3 609.2 514.4 585.1 220.0

Taxation expense (96.0) (86.4) (103.0) (134.9) (84.1)

Profit for the financial year 278.3 522.8 411.4 450.2 135.9

Attributable to:Bupa 278.3 515.7 405.6 439.7 131.1Non-controlling interests – 7.1 5.8 10.5 4.8Profit for the financial year 278.3 522.8 411.4 450.2 135.9

EquityProperty revaluation reserve 632.3 707.9 700.2 631.9 642.7Income and expense reserve 4,797.9 4,590.7 3,940.6 3,544.9 3,075.9Cash flow hedge reserve 20.8 20.0 25.0 25.1 29.0Foreign exchange translation reserve (96.9) 71.4 182.8 590.1 662.7Equity attributable to Bupa 5,354.1 5,390.0 4,848.6 4,792.0 4,410.3Equity attributable to non-controlling interests 69.5 78.4 22.2 25.9 33.6Total equity 5,423.6 5,468.4 4,870.8 4,817.9 4,443.9

Page 136: Longer, healthier, happier lives

134Bupa Annual Report 2015

International Financial Reporting Standards relevant to Bupa

International Financial Reporting Standards relevant to Bupa

International Financial Reporting Standards (IFRS)IFRS 3 Business combinations IFRS 4 Insurance contracts IFRS 5 Non-current assets held for sale and discontinued

operations IFRS 7 Financial instruments: DisclosuresIFRS 8 Operating segmentsIFRS 10 Consolidated Financial Statements IFRS 11 Joint arrangementsIFRS 12 Disclosure of Interests in other entities IFRS 13 Fair Value Measurement

International Accounting Standards (IAS)IAS 1 Presentation of financial statements IAS 2 Inventories IAS 7 Cash flow statements IAS 8 Accounting policies, changes in accounting estimates

and errors IAS 10 Events after the balance sheet date IAS 12 Income taxes IAS 16 Property, plant and equipment IAS 17 Leases IAS 18 Revenue IAS 19R Employee benefitsIAS 20 Accounting for Government Grants and Disclosure of

Government Assistance IAS 21 The effects of changes in foreign exchange rates IAS 23 Borrowing costsIAS 24 Related party disclosuresIAS 27 Consolidated and separate financial statements IAS 28 Investments in associates

IAS 32 Financial instruments: Presentation IAS 36 Impairment of assets IAS 37 Provisions, contingent liabilities and contingent assets IAS 38 Intangible assets IAS 39 Financial instruments: Recognition and measurement IAS 40 Investment property

InterpretationsIFRIC 4 Determining whether an arrangement contains a leaseIFRIC 9 Reassessment of embedded derivativesIFRIC 10 Interim financial reporting and impairmentIFRIC 12 Service concession arrangementsIFRIC 13 Customer loyalty programmesIFRIC 14 The limit on a defined benefit asset, minimum funding

requirements and their interactionIFRIC 16 Hedges of a net investment in a foreign operationIFRIC 17 Distributions of non-cash assets to ownersIFRIC 18 Transfer of assets from customersIFRIC 21 LeviesSIC 15 Operating leases – incentivesSIC 27 Evaluating the substance of transactions involving the legal

form of a leaseSIC 29 Service concession arrangements: DisclosuresSIC 32 Intangible assets – website costs

Notes to the Financial Statements (continued)

for the year ended 31 December 2015

Page 137: Longer, healthier, happier lives

135Bupa Annual Report 2015

Notes

Page 138: Longer, healthier, happier lives

136Bupa Annual Report 2015

Notes

This document may contain certain forward-looking statements with respect to certain of The British United Provident Association Limited group’s (‘Bupa’s’) plans and its 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 future events and circumstances which are beyond Bupa’s control, including, 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. As a result, Bupa’s actual future condition, performance and results may differ materially from the plans, goals and expectations set out in Bupa’s forward-looking statements. Bupa does not undertake to update forward-looking statements contained in this document or any other forward-looking statement it may make.

Page 139: Longer, healthier, happier lives

137Bupa Annual Report 2015

This report has been printed on Vision Superior – an FSC® certified paper containing 100% ECF pulp and manufactured at a mill accredited with the ISO 14001 and EMAS environmental standards.

Designed and produced by SALTERBAXTER MSLGROUP

Printed by CPI Colour. CPI Colour are ISO 14001 certified, CarbonNeutral, alcohol free and FSC and PEFC Chain of Custody certified.

Page 140: Longer, healthier, happier lives

Registered officeBupa House15–19 Bloomsbury WayLondon WC1A 2BA

For further copies of this document+44 (0)20 7656 2300

Corporate affairs+44 (0)20 7656 2176

The British United Provident Association Limited is a company limited by guarantee.

Registered in England No. 432511.

‘Bupa’ and the master brand logo are registered trade marks of the British United Provident Association Limited.

RA / 2015

Longer, healthier, happier lives

bupa.com/annualreport

Annual Report 2015

BU

PA A

NN

UA

L RE

PO

RT 20

15

Our cover photo was taken at our Bellarine care home in Australia in December. It features Margaret Whiting, a resident, together with one of the children who attend the home’s fortnightly intergenerational playgroup. Our residents love planning activities and spending time with the children – a great way to remember and share their experiences as parents and memories of their own childhood.