ANNUAL REP oRT 20 12 LONGER, HEALTHIER, HAPPIER LIVES/media/files/site-specific-files/our-performan… · Geoff’s story 12 Gita’s story 14 Sue’s story 16 Financial review 18

BU

PA A

NN

UA

L RE

Po

RT

2012

ANNUAL REPoRT 2012

LONGER, HEALTHIER, HAPPIER LIVES

Cover image: Jon Sinclair and family walking in Albert Park, Melbourne, where they took part in the 2012 Memory Walk organised by Bupa in partnership with Alzheimer’s Australia. Jon is a resident of Bupa’s Windsor Care Home in Melbourne.

2012 HIGHLIGHTS

TOTAL CuSTOMER NuMBERS (uP 9%)

2012 (11.8m)

2011 (10.8m)

PROGRESS TOWARdS OuR WELL WORLd GOALS

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

18 millionSupporting a healthy planetBy 2015, we will have reduced our absolute carbon footprint by 20%.

4.8% Read more about Bupa’s Well World at bupa.com/wellworld

GROuP REVENuES (uP 4%)

£8.4bnGROuP uNdERLyING PROFIT BEFORE TAx (uP 8%)

£604.0mUnderlying profit is defined in the Financial review on page 19

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

See the full segmental results on page 69

REVENuES By MARkET uNIT PROFIT/(LOSS) By MARkET uNIT

43%30%14%3%10%

48%19%19%(2%)16%

43%30%14%3%10%

48%19%19%(2%)16%

Bupa annual report 2012 1

FIN

AN

CIA

L STATE

ME

NT

SG

ov

Er

NA

NC

E r

EP

or

TSTr

ATE

GIC

rE

Po

rT

Our purpose – longer, healthier, happier lives – drives everything we do. Our new strategic vision defines how we will bring that purpose to benefit more people around the world.During 2012, we developed a new vision for Bupa in 2020 that will enable us to reach millions more people.

In it, we have set out our focus on being a healthcare partner to millions more people around the world, on delivering extraordinary business performance, and on being an organisation where people love to work.

Find out more on page 8

To deliver our vision and bring us closer to our customers, we reorganised our business in 2012. Now operating as Market Units, we are better positioned to serve our customers as their healthcare partner.


Our Well World goals – to have enabled 60m people be healthier and to reduce our carbon footprint by 20%, both by 2015 – are integral to our business, which is why our Well World data is integrated throughout this report.

Our Annual Report and Accounts are also available online, where you can access even more information on Bupa.

Go to annualreport.bupa.com

Stuart Fletcher Chief Executive Officer

Strategic report

Introduction 1

Bupa at a glance 2

Our business model 3

Chairman’s statement 4

Chief Executive Officer’s statement 7

Longer, healthier, happier lives:

Geoff’s story 12

Gita’s story 14

Sue’s story 16

Financial review 18

Market Unit reports:

Australia and New Zealand 22

United Kingdom 24

Spain and Latin 26 America Domestic

International 28 Development Markets

International PMI 30

Our people 32

Risks and uncertainties 34

governance report

Chairman’s introduction 38 to Governance

The Board of Directors 40

Governance leadership 42

Effectiveness 44

Engagement 45

Audit Committee report 46

Risk Committee report 48

Nomination & Governance 49 Committee report

Medical Advisory Panel 50

Remuneration Committee report 52

Remuneration report 54

Report of the Board of Directors 59

Statement of Directors’ 60 responsibilities

FinanciaL StateMentS

Independent auditors’ report 62

Financial statements 63

Five year financial summary 123

International Financial 124 Reporting Standards relevant to Bupa

For video and other additional information, go to annualreport.bupa.com

View our Annual Report and Accounts online

2 Bupa annuaL report 2012 STRATEGIC REPORT

BUPA AT A GLANCE Our 11.8 million customers live in over 190 countries. Our services include health insurance and other funding products, hospitals and primary care centres, chronic disease management, home healthcare, dental centres, prevention and workplace health, and care services, including residential and nursing homes and retirement villages. Our business is managed in five Market Units.

ToTAL CUSToMErS

11.8mToTAL EMPLoyEES

54,000ToTAL CoUNTrIES

190 Market Unit customers or employees Total customers or employees

UNITEd KINGdoM

° Bupa Health and Wellbeing

° Bupa Care Services UK

° Bupa Home Healthcare

° Bupa Cromwell Hospital

Total customers: 2.8m

Total employees: 31,700

INTErNATIoNAL dEvELoPMENT MArKETS

° Bupa Arabia

° Max Bupa, India

° Bupa Hong Kong

° Bupa China

° Bupa Thailand

° Health Dialog, USA

° New Market Development


Total employees: 800

INTErNATIoNAL PMI

° Bupa International

° Bupa Latin America



AUSTrALIA ANd NEw ZEALANd

° Bupa Australia

° Bupa Care Services Australia

° Bupa Care Services New Zealand



SPAIN ANd LATIN AMErICA doMESTIC

° Sanitas Seguros

° Sanitas Hospitales and New Services

° Sanitas Dental

° Sanitas Residencial

° Latin America Domestic Development



3Bupa annuaL report 2012 STRATEGIC REPORT

FUNDHIGH QUALITY, AFFORDABLE HEALTHCARE

ENGAGEPEOPLE AND

SUPPORT BEHAVIOUR

CHANGE

PROVIDE HIGH QUALITY, AFFORDABLE HEALTHCARE

L�g�, �al�i�,happi�

li�

STrA

TEG

IC r

EP

or

T

oUr BUSINESS ModEL

ProvIdING hEALThCArE We deliver healthcare to customers in our own hospitals, clinics, dental centres and primary care centres, and in a range of other settings. Our chronic disease management services help individuals make and sustain lifestyle changes to manage their condition and improve their health. We also provide treatment to patients at home, which can improve patient experience while also reducing costs.

Bupa is a leader in care services, providing nursing and residential care to over 30,000 residents in the UK, Spain, Australia and New Zealand. Our dementia expertise is world-leading. We are setting best practice in person-centred care, including through our dementia care nursing training.

ENGAGING PEoPLE ANd SUPPorTING BEhAvIoUr ChANGE Our services also include preventative healthcare, including identifying high risk groups and providing support and advice to improve their health.

We reach out beyond our customers to provide health information, advice and support to people across the world. This includes our online resources which were accessed by 12m people in 2012.

In 2012, our Global Challenge helped 97,000 people to get walking, a simple way to improve health. Under our Well World goals, we will have enabled 60 million people to make positive changes to be healthier and happier by 2015. We will also reduce our carbon footprint by 20% by 2015.

We fund Foundations in Australia, Spain and the UK which provide grants for healthcare research. Our total charitable donations in 2012, including to our Foundations, was £4.1m.

oUr BUSINESS ModELBupa is a global healthcare company. We fund and provide quality healthcare around the world in a range of settings, including clinics, dental centres, hospitals and care homes. Our services span complex acute care to preventative wellbeing and we engage millions of people in their health, providing them with trusted information and advice.

AN INTEGrATEd ModELWhile we adapt our business model to reflect individual markets’ needs and opportunities, we believe that an integrated approach – combining healthcare funding and provision – offers significant advantages to customers. It brings better oversight of the patient journey and this helps us to make better healthcare more accessible and affordable. This has been demonstrated in our work in Valencia, Spain on behalf of the Valencian regional government.


our business model is shaped by our commitment to serve customers as their healthcare partner.

We are focused on creating person-centred health systems that deliver the right intervention in the right place at the right time. We are committed to meeting customers’ needs across life stages.

As an expert in funding and in providing healthcare, we are able to deliver high quality patient care while managing costs, essential to keeping high quality care accessible.

FUNdING hEALThCArE Through insurance, subscriptions and other funding solutions, we fund healthcare on behalf of our 11.8m customers across the globe.

We have a network of 7,500 hospitals and clinics and more than 200,000 medical providers worldwide.

We partner with healthcare professionals to help us deliver the right treatment to patients and to design patient-centred care pathways.


As a Board, we welcomed Stuart Fletcher as he took the role of Chief Executive officer. Along with his Executive Team, he undertook extensive work in developing a vision for Bupa’s future. we now have a clear definition of how we will pursue our purpose – longer, healthier, happier lives – to benefit many more people across the world.

To position us better to deliver our vision, we reorganised the business around Market Units, bringing us closer to our customers. We also welcomed a new Chief Financial Officer, Evelyn Bourke, to the Board.

On governance, the Board made a series of changes to strengthen our oversight of the business. Following a review, we separated our Audit, Risk & Compliance Committee in two. We implemented an enhanced Corporate Governance Statement, which includes more disclosures. The Remuneration Committee also undertook a review with support from external advisors.

Combined, these and other actions further strengthen Bupa’s governance and transparency, both of which are essential to safeguarding trust in our organisation.

I am more convinced than ever that our status – without shareholders and therefore free to reinvest profits into more and better healthcare – is critical to the relationship we have with our customers and business partners.

Having no shareholders, we are held to account by independent Association Members, who receive no financial benefit from Bupa. They are committed to seeing us discharge our purpose effectively.

Our status is of particular value when trust in other organisations has been questioned and eroded. People are looking for new models and changed cultures for value creation in society as well as a different kind of accountability.

ChAIrMAN’S STATEMENT2012 was a year of considerable change for Bupa, and at the same time we also reaffirmed our enduring purpose. In the year, pressure on healthcare spending – and on provision models – remained intense. We also saw trends in health further converge across developed and developing economies.

Lord LeitchChairman

BoArd hIGhLIGhTS FroM 2012 ° Stuart Fletcher and Evelyn Bourke joined the Board as CEO and CFO respectively. New to Bupa, they bring with them rich experience and expertise. They underwent a detailed induction programme, including one-to-one meetings, site visits and detailed briefings on Bupa’s performance and history.

° To strengthen our governance and oversight, we split our Audit, Risk & Compliance Committee in two. The Audit Committee now focuses on financial statements, and the effectiveness of internal controls systems and of auditors; the Risk Committee focuses on risk appetite, risk management and compliance.

° Succession planning was a key theme for 2012, with three Board members nearing the end of their term. Retirement dates have been phased to ensure an orderly succession.

° The Remuneration Committee undertook a review with external support to benchmark its activities and developed an action plan.

° We adopted a new Corporate Governance Statement with the aim of increasing the disclosure of our governance arrangements and the workings of each of the Board’s Committees.

read more in Governance on page 38


STrA

TEG

IC r

EP

or

T

UrBANISATIoN ANd hEALThThe number of people living in cities is set to rise to 5bn worldwide by 2030. This growth will largely be unplanned.

People who move to cities increase their chance of developing chronic conditions, such as diabetes, through greater exposure to risk factors including greater use of motor transport, too little physical activity and unhealthy diets, as well as increased exposure to greenhouse gas emissions.

“Chronic diseases represent a developmental, as well as health, challenge.”

Globally, the number of individuals with diabetes is projected to rise to 552m by 2030, or 10% of the world’s adult population, 80% of which will be in developing countries.2 Latin America, the Middle East and sub-Saharan Africa are predicted to see a near tripling of ischemic heart disease and stroke mortality over the next two decades.3 In 2008, cancer accounted for the deaths of 7.6m people – 13% of all deaths worldwide. More than 30% of these could be prevented, mainly by reducing tobacco usage, but also through a healthy diet and lifestyle and moderating the consumption of alcohol.4

Growing global middle class As well as this convergence in health risks, we are seeing a growth in middle classes in developing economies and an associated trend of urbanisation, which itself can be a driver for behaviours which negatively impact health. More people than ever now live in cities and by 2050, around two thirds of the world’s population is expected to be urban.5

Middle class consumers have increased expectations of the services they want, including from healthcare, as they become more aware of their needs and their ability to afford choice.

Ageing and ageless societies The global population is ageing sharply. The percentage of those aged above 60 years at the turn of the millennium was around 10% – this is projected to rise to 20% by 2050.6 This phenomenon is not confined to developed economies, with many developing economies being only a few decades behind as birth rates decrease and life expectancy increases. This demographic shift represents both the success of, and a challenge to, healthcare systems. The critical challenge it presents is the increase in the number of people living with dementia. By 2050, more than 115m people across the world are projected to have the condition, raising massive challenges in care, treatment and cost.7

A key trend that we are seeing associated with the ageing population is that people are thinking more about the kind of old age they want. In reality, they want to be ageless – they want to keep well and they want to preserve the independence and lifestyle they enjoyed while younger. There is a growing need for care solutions that preserve individuals’ independence.

These are areas where I believe Bupa’s model has a lot to offer.

Bupa is at an inflection point in terms of the healthcare services that people need and in Bupa’s development in meeting those needs. The Board is excited about the impact the new vision – Bupa 2020 – will have, and the step change in delivery it signifies.

oUr MArKETPLACE Bupa serves customers living in almost every country around the world. Across markets, we are seeing a number of key trends that drive individuals’ healthcare needs. They are shaping our marketplace today and will see it radically transform over time.

Converging global health risksHealth risks are converging across the world and across economies, underpinned by common risk factors, principally an unhealthy diet and physical inactivity. Changes to lifestyles and diets as societies industrialise have significant implications on populations’ health.

The impact is immense. By 2030, it is estimated that chronic diseases will cost US$47trn and will represent a developmental as well as health challenge.1

1 ‘The Global Burden of Noncommunicable Diseases’, World Economic Forum, 2011.

2 ‘Atlas 5th Edition’, International Diabetes Federation, 2012 Update. 2012 data.

3 ‘The Global Burden of Chronic Diseases: Overcoming impediments to prevention and control’, Derek Yach, 2011.

4 ‘Cancer Factsheet’, World Health Organization, 2013. 2008 data.

5 ‘World Urbanization Prospectus: The 2011 Revision’, United Nations, 2011.

6 ‘World Population Ageing 1950-2050’, United Nations, 2002.

7 ‘Dementia: A public health priority’, World Health Organization, 2012. 2010 data.

8 ‘Cardiovascular Conditions Factsheet’, World Health Organization, 2012. 2008 data.

ProjECTEd rISES IN NoNCoMMUNICABLE dISEASES

Diabetes2

371m

552m

Dementia7

35.6m

65.7m

GLoBAL dEAThS CAUSEd

cancer4

7.6m

13.1m

Heart disease8

17.3m

23.3m

Current 2030

read more in Bupa’s win-win report on bupa.com/wellworld


Changing family structuresThe impact of ageing populations, combined with increased expectations around lifestyle and independence, is exacerbated by changes in family structures. At a time when growing numbers need support, family support is declining. This is not just for the elderly but also for those with chronic conditions or disabilities. These factors are creating a need for alternative care solutions.

Price sensitivityIncreasingly, consumers only want to pay for services that are relevant to them. This desire for more personalised services is linked to a focus on seeing value for money. New technologies contribute to this growing expectation as individuals have ever greater power to access the information and services they want.

Environmentalism and sustainabilityFinally, consumers want to make sustainable choices. There is a much greater understanding that lifestyle impacts the environment and that this, in turn, impacts health and wellbeing – from water use to food scarcity to air pollution. Consumers increasingly want to know that the products and services they use are economically and environmentally sustainable and do not adversely impact on health.

A shift in value for healthcareOne consequence of these trends is a shift from treatment to prevention. We are beginning to see health systems assessing healthcare risk and aligning incentives to produce the best outcomes at an affordable price. In Spain, for example, we have seen the effective operation of an innovative Public-Private Partnership (PPP) in Valencia which has moved health management from the public to the private sector. The Valencian government has reformed the funding and provision of care – and Bupa is at the heart of this partnership.

With the increased prevalence of chronic diseases, managing health risk involves helping individuals to take steps to reduce their risk indicators – namely to be healthier. While breakthroughs in areas like robotic surgery get headlines, in many countries 70% of healthcare costs are driven by chronic disease and the most important levers to improve outcomes and reduce costs are not necessarily clinically sophisticated.9 They can, however, be challenging to deliver as they require individuals to make and sustain significant lifestyle changes.

Implications for Bupa The challenge to deliver better health to more people has never been greater. In each of these areas, we see huge potential for our business – to deliver the services that individuals need in a way that they want at a price they can afford, be that directly, through their employer or via government.

The great risk, which is not confined to Bupa but extends across healthcare, is that a broad spectrum of quality care ultimately becomes unaffordable.

We are addressing this challenge head on, as can be seen in the strategic vision Stuart sets out for the business. I believe that our potential to make a significant difference to millions of people’s lives across the world has never been greater and our focus never sharper.

Board news I want to take this opportunity to thank the Board for the past twelve months – particularly for their energy and passion in a year of huge change. Particular thanks go to Baroness Bottomley, whose six year tenure on our Board concludes in April 2013. She has been a great source of wisdom and her contribution to this business has been invaluable.

Finally, I want to thank our people. There is a shared value of care – for customers, their families and each other – and I regularly see our people going well beyond what is expected and required. This commitment is what makes Bupa extraordinary. I’m very proud of what we have achieved together and excited about what is ahead.

Lord Leitch Chairman

ChAIrMAN’S STATEMENT CoNTINUEd

ShIFTING ThE vALUE FroM CUrE To PrEvENTIoN IN vALENCIA, SPAINIn Spain, Bupa’s Manises hospital covers 14 towns and a population of 195,000 people in Valencia, on behalf of the region’s government. We also manage 20 primary health centres and two speciality centres.

As well as providing world class, innovative hospital care, Sanitas works with the local population to keep them well and diagnose and treat conditions early.

This can reduce the likelihood of health issues becoming critical and improve health outcomes. For example, we have improved our performance in controlling the risk factors for cardiovascular conditions, compared to 2011.

9 ‘The almanac of chronic disease’, Partnership to Fight Chronic Disease, 2009.


STrA

TEG

IC r

EP

or

T

We also announced our intention to acquire Innovative Care’s care homes. Now completed, the deal added more than 1,100 beds and made us Australia’s largest private care services provider.

Organic growth in our development markets continued apace, with Bupa Mexico, one of our health insurance operations, driving good growth in customer numbers as a result of opening six new sales offices and launching new products.

We also accelerated our plans to make quality healthcare more affordable and accessible, and ensure health insurance delivers tangible value for money. In the UK, we provided detailed evidence to the Competition Commission to call for remedies that deliver greater competition, efficiency and transparency in the private healthcare provision market. There are no easy solutions, but a lack of competition between hospitals and information on quality of care is pushing up the cost of insurance premiums, which continue to rise at unsustainable levels.

Also in the UK, we made changes to address excessive claims inflation driven both by private hospital and consultant fees and practices. The changes, while not always popular, are necessary to ensure more UK customers are able to access affordable, high quality private healthcare. There is still much to do but we have created a foundation to turn this market around.

We grew our business in ways that, we believe, allow us to deliver quality health outcomes. In Spain, our integrated health funding and provision model continued to provide differentiation in the market, enabling growth. This model, based on quality of health outcomes, is, we believe, a good model for the future of sustainable quality healthcare. We acquired the remaining 40% share in our Public-Private Partnership (PPP) in Valencia and purchased a 50% stake in Torrejón Hospital in Madrid, our second PPP. The business performed very well despite a challenging economic environment.

In December 2012, we announced our intention to acquire LUX MED, Poland’s largest private healthcare company. Subject to regulatory approval, LUX MED will make Bupa the largest company in Poland’s private healthcare funding and provision markets, adding 1m new customers.

Bupa’s performance in 2012 was particularly strong given the economic conditions in a number of our markets, especially in Europe.

We created new, innovative, lower cost products for corporate customers, for the self-employed and for individuals. Our international private medical insurance business developed products that are more flexible and tailored to the needs of the individual.

In Australia we supported families and niche groups with specialist services and advice.

We expanded dental provision in Spain and the UK and are currently in negotiations with the shareholders of Dental Corporation, Australia and New Zealand’s largest dental business, to purchase the business’s 190 clinics. The transaction is subject to the majority of shareholders voting in favour of a scheme of arrangement.

Also in Australia and New Zealand, we extended our retail offering with two new dental centres providing eye care, health screenings and nutrition and wellbeing advice. New care homes were opened or acquired across the two countries adding 640 beds.

ChIEF EXECUTIvE oFFICEr’S STATEMENTWe launched a new strategic vision, Bupa 2020, accelerating our pace of growth and delivery. In the year, we delivered strong growth, with revenues up 4% and underlying profit up 8%, maintaining our record of year-on-year growth since the start of the global downturn.

Stuart FletcherChief Executive Officer


TACKLING THE T

OU

GH

EST

CH

AL

LE

NG

ES

THAT’S RIGHT FOR ME

IN HEALTHCARE – M

AK

ING

A D

IFF

ER

EN

CEO

BS

ES

SIV

E A

BO

UT M

AKING QUALITY

HE

ALT

HC

AR

E A

FF

OR

DA

BLE AND ACCESSIBLE

ACCESS TO ADVICE AND CARE

L�g�,�al�i�,

happi� li�

BUSINESSPERFORMANCE

EXTRAORDINARY

MIL

LIO

NS

MO

RE P

EOPLE

A H

EA

LTH

CA

RE

PARTNER TO

AR

OU

ND

TH

E

WORLD LOVE W

OR

KIN

GPEO

PLE

AT BUPA

In health funding, LUX MED is Poland’s market leader in medical subscriptions. In provision, it has a national network of outpatient clinics and diagnostic centres, as well as a day hospital and a large nursing and residential care home. Its model aligns with Bupa’s ambition to see greater integration between healthcare funding and provision.

We are in a good position to grow our business in 2013 through a combination of organic growth, acquisition and partnership. Difficult economic conditions will continue in Europe but increasing consumer expectations,

ageing populations, rising levels of chronic disease, and new treatments will continue to fuel demand for healthcare and drive our growth. Around the world, our combination of healthcare funding and provision expertise, our integrated model, and our international operations will continue to differentiate us.

A NEw vISIoN For BUPAIn 2012, the newly created Bupa Executive Team focused on creating an ambitious vision for what Bupa will look like in 2020. The development of Bupa 2020 was a major area of work. This new strategic vision sets our direction and focus for the next decade.

Bupa is a great company with a rich heritage. As CEO, I see my role as providing the leadership that will enable us to realise Bupa’s full potential; in essence, to fulfil our distinctive and inspiring purpose – longer, healthier, happier lives.

An important enabler of our delivery of that potential is our status, which was a great attraction for me when deciding to join Bupa. It maximises the degree to which we can pursue growth opportunities for the benefit of customers and society more broadly.

As an executive team, in asking ourselves how Bupa will better fulfil its purpose, we challenged ourselves to identify how to accelerate our growth to reach millions more people in more places to more effect.

We also asked how we will make our purpose count in the eyes of customers, healthcare systems and the communities within which we operate, and with our own people, the ingredient which truly makes Bupa special.

We believe that the conclusions we reached are exciting and motivating for all our stakeholders around the world. The key elements of Bupa 2020 are summarised here:

we will deliver our purpose through being a healthcare partner to millions more people around the world.We intend millions more customers will enjoy better health because of Bupa. To achieve this goal, trust is essential, and we intend our customers to trust us and recommend us unreservedly. We will also engage tens of millions more people around the world in their health and wellbeing. Under our Well World sustainability agenda, we have committed to helping 60m people make positive changes to be healthier and happier by 2015.

we will reach millions more people as we deliver extraordinary business performance.We will build on our success to deliver strong and sustainable revenue and profit growth, which will ultimately provide the means for us to reach more people and better fulfil our purpose. To support our efforts, we will be financially disciplined and ensure we invest to create long-term economic value.

As we can have a big impact on the world’s health, we are also committed

ChIEF EXECUTIvEoFFICEr’S STATEMENT CoNTINUEd

BUPA 2020


STrA

TEG

IC r

EP

or

T

“As an executive team, we asked ourselves to identify how to accelerate our growth to reach millions more people in more places to more effect – in essence, to fulfil our distinctive and inspiring purpose.”

“We believe integrated healthcare delivers better outcomes at lower cost and will be key to giving more people access to quality healthcare.”

we will be obsessive about making quality healthcare affordable and accessible.As an executive team, and throughout the business, we are utterly committed to tackling rising healthcare costs while ensuring better health outcomes. Affordability is essential for good healthcare to be accessible, and it is fundamental to our commitment to democratise good healthcare.

Among Bupa’s 54,000 people, we have considerable and world-leading healthcare expertise. We will harness this knowledge to greater effect for customers and their communities, through taking a greater role in shaping patients’ healthcare journey and by working with health systems to shape health policy in the interests of communities. Increasingly, we are seeing the powerful benefits of integrated healthcare – funding, commissioning and provision. Patients report higher levels of satisfaction and we can deliver it at lower cost. We believe greater integration will be key to giving more people access to quality healthcare.

we will tackle the toughest challenges in healthcare – and make a difference.Good health is essential – to happy families, to thriving communities, to efficient economies. The challenges to securing good healthcare are immense.

As populations age, more and more people are expected to live with dementia and require support to maintain their quality of life. Bupa is already a global leader in dementia care and we have leading experts who have been helping us to set new standards in person-centred care for older people for many years. We will stand up for the frail and elderly in our society to protect their interests and safeguard their wellbeing and dignity.

to having a positive impact on the environment as we believe that good health and the environment are interdependent. We remain committed to our Well World goal of reducing our carbon footprint by 20% by 2015.

we will excel when our people love working at Bupa.We will cultivate an extraordinary culture and organisation. And we will practise what we preach, which means Bupa employees being healthier as a result of working at Bupa, as well as making a big impact in their communities.

We believe that when we do these things, we will make a difference that matters to people – our customers, our employees and well beyond.

we will be giving more people access to advice and care that is right for them as an individual.We will be trusted by our customers to be there for them when they need it, providing support through their lives.

I am inspired by the many stories of customers who, at very difficult times during their lives, have found Bupa’s support invaluable, and appreciate that they were cared for as an individual rather than as “a medical condition”. Our aim is to do more of this for more people.

While support is most acutely valued when a person is facing a life-threatening illness or a debilitating condition, we will go beyond these boundaries to help more people take steps to improve their overall health and quality of life, and reduce their risk of developing serious conditions such as diabetes, cancer or heart disease.

We will partner with the best to be the best at providing advice and care that is world-leading, innovative and, above all, effective.

rEorGANISING oUr BUSINESS To dELIvEr BUPA 2020Until October 2012, the business was organised in a number of divisions, each run from the UK.

To bring us closer to our customers, we restructured the divisions into Market Units – Australia and New Zealand, UK, Spain and Latin America Domestic, International Development Markets, and International Private Medical Insurance.

Market Units are now the operating units through which we run our business. Within these are business structures which allow us to focus on specific opportunities in the market.

While each market is now run locally and has greater autonomy, the executive team takes accountability for the whole of Bupa and ensures we work together across the business to realise our Bupa 2020 intentions.


leading experts and advocacy groups to gather together expertise and bring about change at system level and with individuals.

Cancer remains the condition most feared across the world by individuals, and is a leading cause of death worldwide. We will take a truly holistic approach to cancer – from prevention and treatment, to surviving well and dying with dignity. We are committed to partnering with people and their families through this very difficult illness to give them greater control and improve outcomes.

This is a big vision. It builds on what has made Bupa successful so far and it is underpinned by our heritage, history and capabilities but it is a major step-change in our ambitions and defines much more clearly and precisely what we are committed to becoming and what we are aiming for – to colleagues, customers, partners and healthcare systems. It also fully aligns our Well World sustainability agenda – keeping people well and supporting a healthy planet – with Bupa’s strategic vision.

We are still in the early stages of this new phase in our development. Starting in 2013, we will be tracking our progress against a scorecard and we will report on the progress we are making in our 2013 Annual Report and Accounts.

The challenges we have set ourselves are immense, but in the year I have been at Bupa, the appetite, ambition and passion that I find in my colleagues has fuelled the vision we have developed together and I am excited by the potential that I see around me to make an enduring difference.

Realising that potential and bringing it to life I see as my purpose as leader of this business. Reflecting on the past year, the scale and pace of change that we have embraced together has been remarkable. There is huge ambition and we are already starting to see the impact on our results.

I thank every single one of our 54,000 people for their commitment and dedication. They make Bupa special. I also want to take this opportunity to thank my Bupa Executive Team colleagues, each of whom share with me the vision for Bupa and a passion to create a truly extraordinary organisation.

By 2030, deaths due to noncommunicable diseases are projected to rise substantially and will be the most common cause of death. We will use our expertise to help individuals take steps to reduce their risk of developing a chronic condition, starting with diabetes and cardiovascular disease. We will also help people who have a condition to manage their health, reduce their risk factors and improve their quality of life.

Changing behaviour, and sustaining that change, is rarely sophisticated but it is always difficult. We will partner with

“Bupa’s founding principle back in 1947 was to ‘prevent, relieve and cure sickness and ill health of every kind’. Today, these areas remain essential as we pursue our purpose – ‘Longer, healthier, happier lives’.”

A ShArEd vISIoN For ThE FUTUrE Discussions about our strategic vision were initiated in the Bupa Executive Team in April 2012.

We then shared those discussions with the Board in June 2012, where our conclusions were tested and further developed.

Having finalised our Bupa 2020 work in September, we took the vision to 200 of our most senior managers in a workshop, where we shared the vision and strategic goals and how together we would each take accountability for inspiring, engaging and energising our people to deliver them.

We are now engaging people at all levels of the business to have them contribute to how we will together fulfil our purpose and make a huge impact on the health and wellbeing of millions of people around the world.

This past year has genuinely exceeded my expectations and it is an absolute privilege to, with them, lead Bupa to reach more people with our purpose of longer, healthier, happier lives.


ChIEF EXECUTIvEoFFICEr’S STATEMENT CoNTINUEd


STrA

TEG

IC r

EP

or

T


dean holdenManaging Director, Australia and New Zealand

Evelyn Bourke Chief Financial Officer

richard Bowden Managing Director, United Kingdom

Iñaki EreñoManaging Director, Spain and Latin America Domestic

yasmin jethaChief Information Officer

robert LangManaging Director, International PMI

Alison PlattManaging Director, International Development Markets

Paul Zollinger-readChief Medical Officer

denise CollisChief People Officer

Steve john Corporate Affairs Director

Nicholas BeazleyCompany Secretary

oUr vISIoN wILL ACCELErATE oUr GrowTh To rEACh MorE PEoPLE

IN MorE PLACES To MorE EFFECT.Read about what we are already doing to realise our ambitions

and reach more people with our purpose – longer, healthier, happier lives.

BUPA EXECUTIvE TEAMThe Bupa Executive Team takes collective responsibility for Bupa’s purpose and for Bupa 2020. This means working across accountabilities and addressing challenges together so that Bupa is better able to serve more people.

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


Making and sustaining positive lifestyle changes is difficult. with soaring rates of chronic disease, we believe that helping people adopt a healthier lifestyle is the single most effective way we will help people live longer, healthier, happier lives.

In Australia, our Integrated Osteoarthritis Management Programme is helping customers to improve their health by

providing them with a tailored programme that helps increase their mobility, manage pain, lose weight and improve fitness.

It is designed to be simple, home-based and flexible.

Geoff started the programme on the recommendation of his orthopaedic surgeon. Weighing 110kg, the pressure

on his knees was a major cause of pain. Through the programme, Geoff lost 23kg, saw his knee pain significantly reduce and has taken up running.

Access to advice and care that’s right for me

Bupa annual report 2012 13Bupa annuaL report 2012 STRATEGIC REPORT

13

STrA

TEG

IC r

EP

or

T

97,000peopLe acroSS tHe WorLD tooK part in Bupa’S 2012 gLoBaL cHaLLenge on WaLKing.

Walking is the most accessible form of activity for all ages and abilities. Walking an extra 15 minutes a day can extend a person’s life by up to three years. Source: Get Walking, Keep Walking, Bupa & C3

geoff russellIntegrated Osteoarthritis Management Programme customer

883,000peopLe We HeLpeD to Be HeaLtHier tHrougH our coMMunitY partnerSHipS.

Initiatives ranged from providing health risk assessments to shoppers in malls with Diabetes UK, to encouraging commuters to walk to work with the Pedestrian Council of Australia.

12mpeopLe acroSS tHe WorLD acceSSeD our HeaLtHcare inForMation onLine in 2012.

In addition, 530,000 downloaded our healthy apps, which help people take simple steps to be healthier and reduce their risk of developing a chronic condition, such as diabetes or heart disease.

1.1mpeopLe We HeaLtH coacHeD in 2012.

Health coaching helps people improve their health and reduce the risk of developing chronic conditions.

Access to healthcare services is severely limited for many millions of people. In rural India, many families live below

the poverty line and diseases of poverty, such as pneumonia and diarrhoea, are leading causes of death

for children in the country.

Bupa is working with Bihar’s regional government to implement Rastriya Swasthya Bima Yogna (RSBY), or National Health Insurance Programme. Funded by the government, the

scheme provides low cost health insurance to families living below the poverty line. Families are recruited via community

road shows, with up to 3,000 people joining the scheme daily.

This initiative is transformational. It is also a first step. Utilising the experience gained from RSBY, Bupa is

developing new micro health schemes that can be taken to scale in India and beyond.

Obsessive about makingquality healthcare

affordable and accessible

Bupa annuaL report 2012 STRATEGIC REPORT

1414

STrA

TEG

IC r

EP

or

T

800HoSpitaL QuaLitY aSSeSSMentS coMpLeteD in inDia.

We have been working with our network of provider hospitals in India since 2010, undertaking quality assessments and providing advice on how to raise standards and improve the quality of care to patients.

12.5%LoWer HoSpitaLiSation rate.

Health Dialog’s shared decision making programme delivered significantly lower hospitalisation rates as well as 5.3% lower healthcare costs compared with usual levels of support. This is another way we are making quality healthcare more accessible.

696,000peopLe JoineD tHe rSBY ScHeMe eStaBLiSHeD BY Bupa in 2012.

The scheme gives families access to in-patient treatment in private and public hospitals.

gita DeviCommunity leader, Phulpras Block of Madhubani District, Bihar, India

25% LoWer coSt per patient at our ManiSeS HoSpitaL coMpareD WitH otHer puBLic HoSpitaLS in tHe region.

90% of patients treated would recommend the hospital and, compared to all Spanish public hospitals, patients rate nearly all medical areas as above average.


15

Bupa annual report 2012 Strategic report

16

At Bupa, we will focus on where we believe we can make the greatest difference – in cancer care, diabetes,

heart disease and dementia.

For cancer care, this means taking a truly holistic approach and caring for the whole person – from swift diagnosis

to leading treatment and care.

Our approach made all the difference to Sue. Diagnosed with advanced facial skin cancer, Sue decided to opt for radical

surgery. Although this meant removing a quarter of her face, she knew this surgery would give her the best chances of

survival. Sue then had facial reconstruction surgery by a leading specialist. Bupa was by her side all the way.

Today, her scarring is hardly noticeable.

1616

Tackling the toughest challenges in healthcare – making a difference


Bupa annual report 2012 17

Sue Mcintosh-gibbs Bupa UK customer and cancer survivor

7,500uK Bupa care HoMe StaFF WHo receiveD SpeciaLiSt ‘perSon FirSt, DeMentia SeconD’ training.

Pioneered by Bupa’s Prof Graham Stokes with the University of Bradford, the programme is helping care home staff provide leading person-centred care to our residents.

450,000patientS treateD in our HoSpitaLS in 2012.

Among these were cancer patients receiving care in our Oncology Advice and Care Units in Spain. The units combine the most advanced treatment with emotional support for the patient and their family.

5,000auStraLian cuStoMerS treateD BY tHe geneSiS Heart care netWorK in 2012.

Bupa has a partnership with the Genesis network of cardiologists to provide quality, evidence-based care to customers with heart disease as well as support to help them understand their condition, treatment and care options.

17

75,000 HeaLtH aSSeSSMentS proviDeD in Bupa WeLLneSS centreS.

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

STrA

TEG

IC r

EP

or

T



FINANCIAL rEvIEwStrong international performance in 2012 has driven good growth in revenue and underlying profit. We are laying the foundations for Bupa 2020 with prudent management of our balance sheet and finances, along with increased investment.

we have delivered a good set of financial results in 2012, with strong international growth. revenues were 4% ahead of last year and underlying profit before tax was up 8%. These results were delivered against a backdrop of continuing economic and regulatory pressures in Europe, as well as a continued decline in the UK health insurance market that has been evident for a number of years.

2012 also marked the start of a journey for Bupa. We set ourselves an ambitious vision for 2020, a key component of which is delivering strong and sustainable revenue and profit growth and ensuring our investments create long-term economic value. Through extraordinary business performance, we will have the resources to become a healthcare partner to millions more people around the world.

We have started to make progress towards achieving our vision. In 2012, we invested in new and existing businesses, with capital investment up 16% to £246.5m. Our people also secured five significant acquisitions; two completed in 2012; one completed in early 2013; and

Evelyn Bourke Chief Financial Officer

rEvENUE By MArKET UNIT

43%30%14%3%10%

30%24%22%18%6%

48%19%19%(2%)16%

ProFIT/(LoSS) By MArKET UNIT

43%30%14%3%10%

30%24%22%18%6%

48%19%19%(2%)16%

NUMBEr oF CUSToMErS By MArKET UNIT

43%30%14%3%10%

30%24%22%18%6%

48%19%19%(2%)16%

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

SUMMAry oF rESULTS

2012 £m

2011 £m

Total revenues 8,373.9 8,018.1Underlying profit before tax 604.0 559.0Non-underlying items (20.4) (339.0)Profit before taxation 583.6 220.0Taxation (134.9) (84.1)

Profit for the year 448.7 135.9


STrA

TEG

IC r

EP

or

T

the remaining two are expected to complete in Q2 in 2013, subject to regulatory approval.

During the year we successfully renegotiated a five year £800m committed bank facility. With our ownership structure, the availability of this facility is important in supporting our ambitious growth targets.

In addition, robust cash flow from our operations and prudent management of our strong balance sheet has contributed to Bupa maintaining a low leverage and a solid credit rating. This will support our future ambitions.

oPErATING rESULTSOur continuous product and service innovation and our strong focus on being a healthcare partner has grown our customer base by 9% to 11.8m.

On the back of this customer growth, revenues increased 4% to £8.4bn. This increase was driven by our Australian, Spanish and International PMI Market Units. 70% of Bupa’s revenues now come from international operations and this will continue to grow as we expand our global footprint.

Underlying profit before tax increased by 8% to £604.0m with reported profit before tax up 165% to £583.6m.

An enhanced focus on operational efficiencies, combined with our growth in customers has delivered strong profit performances in our Australian, Spanish and International PMI businesses.

This has enabled us to reinvest into our businesses through the development of new products tailored to our customers’ changing needs and investment in the quality and capacity of our care home portfolio. Such investment contributes

to our vision of making quality healthcare affordable and accessible for even more people around the world.

We also had strong growth in our Asian and Middle East insurance businesses, with Bupa’s healthcare expertise a key differentiator in these markets.

Sustained weak economic conditions adversely impacted profits from our UK business. In this market, we are actively managing the rising costs of healthcare, looking at ways to combat lower consumer confidence and identifying efficiencies in a customer centric manner to offset the impact of real term declines in fees from local authorities.

Health Dialog also faced continuing challenges from the changing USA healthcare landscape. The business is better placed to deliver on opportunities in 2013, following restructuring in 2012.

NoN-UNdErLyING ProFIT ITEMS For underlying profit, to reflect the trading performance of the business in a consistent manner, we adjust profit before tax for impairment and amortisation of intangible assets arising on business combinations, net revaluation and impairment charges on property, gains or losses on return seeking assets, foreign exchange, profit or loss on sale of business and one-off items.

2011 was impacted by the significant impairments on our Health Dialog business and the impairment of the MBF brand, following the transition to the Bupa brand in Australia. In 2012, the launch of Bupa 2020 and the associated reorganisation of our business resulted in some one-off costs being incurred.


2012 £m

2011 £m

Restructuring costs 23.2 –Impairment of intangible assets arising on business combinations – 299.5Amortisation of intangible assets arising on business combinations 26.8 34.9Net property revaluation and impairment charge 5.1 17.5Gains on return seeking assets, net of hedging (26.1) (6.6)Other (8.6) (6.3)

Total 20.4 339.0

NoN-UNdErLyING ProFIT ITEMS

“Our strong focus on being a healthcare partner has grown our customer base by 9% to 11.8m.”

UNdErLyING ProFIT BEForE TAX

£604.0m2012 £604.0m

2011 £559.0m

2010 £464.9m

2009 £428.2m

2008 £413.4m

GroUP rEvENUE

£8.4bn2012 £8.4bn

2011 £8.0bn

2010 £7.6bn

2009 £6.9bn

2008 £5.9bn


FINANCIAL rEvIEw CoNTINUEd

SoLvENCy IIIn 2012, the FSA acknowledged a delay to the implementation of Solvency II and set out a new planning horizon of 31 December 2015.

Two years ago, we set up a programme to assist all our businesses with the implementation of Solvency II. This activity has now been transitioned into business-as-usual activities in a disciplined and controlled way. From January 2013, Bupa’s state of readiness for Solvency II will be regularly assessed by our Solvency II Committee.

CoNCLUSIoNBupa delivered good results in 2012 despite some significant challenges in our European markets. We remain cautious about the economic outlook although we are confident that Bupa will continue to deliver growth in 2013.

We have worked hard during 2012 to make sure we are in a strong financial position to take advantage of future growth opportunities, which will contribute to our ambition of positively impacting millions more lives. We will maintain a strong focus on delivering sustainable growth to support Bupa’s purpose of longer, healthier, happier lives.

Evelyn BourkeChief Financial Officer

BALANCE ShEET, FUNdING ANd SoLvENCy We seek to manage our business within financial ratios that support a solid investment grade credit rating, providing a secure platform for our sustainable growth ambitions.

Our principal debt ratings relate to Bupa Finance plc’s senior unsecured bond. During the year, Fitch and Moody’s both reaffirmed their ratings in relation to this debt at A- (stable) and Baa2 (stable) respectively.

Leverage reduced to 19% following the repayment of short-term borrowings in 2011.

We continuously monitor the solvency position of our regulated companies and for the group as a whole. We maintained strong solvency headroom throughout 2012.

CASh FLowWe generated £742.9m in operating cash flows, up 44% and the fourth consecutive year in which we have delivered operating cash flows in excess of £500m.

The significant uplift in cash generated was in part due to the advance payment of premiums in Australia as a result of regulatory changes on 1 July 2012. Excluding the impact of this, the robust performance has contributed to a solid foundation to grow our business in a sustainable manner.

We invested £246.5m in capital expenditure, continued to repay interest bearing liabilities and held the rest in cash and lower risk assets such as corporate bond funds.

Aside from operating cash flows, Bupa’s main source of liquidity comes from the £800m committed bank facility, which remains almost entirely undrawn.

NoTES

Financial income and expenditureNet financial income increased to £54.8m (up 167%), primarily due to the strong performance on the return seeking asset portfolio (up £19.5m to £26.1m).

taxBupa’s taxation expense represents a headline rate of 23.1%, which is lower than the UK corporation tax rate as a result of prior period tax credits.

The Budget statement in December 2012 announced that the UK corporation tax rate will reduce to 21% by 2014.

cash and other financial assetsTotalled £3,559.9m (up 14%). Our exposure to Eurozone bank deposits has been reduced over the course of 2012 as part of our ongoing risk management.

Foreign exchangeApproximately 65% (down 1%) of net assets are denominated in foreign currencies, primarily Australian Dollars and Euros.

“Bupa is in a strong financial position to take advantage of future growth opportunities.”

21

STrA

TEG

IC r

EP

or

T


“In 2012 we reorganised our business to support Bupa 2020. We now operate our business around five Market Units, which comprise individual businesses that reflect our product offerings.”

AUSTrALIA ANd NEw ZEALANd This Unit comprises the largest privately owned health insurance provider in Australia and privately owned care home operations in Australia and New Zealand. It delivered very strong growth in revenue, profit and customers, driven by investment in new products and homes. The business has also had to manage the impact of government reforms to social care funding and private health insurance legislation. In 2013, we will focus on growing our care home portfolio, maintaining our healthcare partner proposition and looking at opportunities to continue to invest in our largest Market Unit.


rEvENUE

£3,554.0m2011: £3,252.8M (UP 9%)

ProFIT

£278.3m2011: £249.0M (UP 12%)

UNITEd KINGdoMThe UK Market Unit comprises private health insurance, wellbeing services, care homes, out of hospital healthcare services and a complex care hospital in London. In 2012, these businesses operated in very challenging conditions, which restricted growth in revenues and led to a disappointing profit performance. Continued pressure both on funding and costs, including medical claims costs, is expected in 2013. To combat this we are investing in new products, focusing on operational efficiencies and delivering excellent customer service to drive growth.


rEvENUE

£2,528.8m2011: £2,506.2M (UP 1%)

ProFIT

£109.7m2011: £140.9M (DOWN 22%)

SPAIN ANd LATIN AMErICA doMESTICBupa’s Spanish operations provide an integrated private health insurance and provision model, operate Public-Private Partnerships, a network of care homes for the elderly, dental centres and other health and wellbeing services. Despite a tough economic environment with unemployment reaching 25%, the business delivered a strong performance with growth in customers and profit. Revenues also grew 5% when the impact of foreign exchange movements is removed. In 2013, we will maximise efficiencies and explore opportunities in Latin America.


rEvENUE

£1,190.8m2011: £1,212.6M (DOWN 2%)

ProFIT

£113.4m2011: £106.1M (UP 7%)

INTErNATIoNAL dEvELoPMENT MArKETSInternational Development Markets is focused primarily on investments in markets with significant future growth potential. The existing insurance businesses have shown strong growth in customers and revenue, as we focus on healthcare expertise to differentiate Bupa from our competitors. The overall decline in the year was as a result of the challenges faced in Health Dialog and restructuring costs incurred to reposition it for 2013. In 2013, we will continue to expand this Market Unit.


rEvENUE

£227.3m2011: £244.2M (DOWN 7%)

ProFIT/(LoSS)

£(11.5m)2011: £(9.1M) (DOWN 26%)

INTErNATIoNAL PMIIPMI is our global Market Unit, providing a tailored insurance proposition to a growing mobile workforce. This business delivered very strong growth in customer numbers, revenue and profit driven by Asia, the Middle East and North Africa. Product innovations, an emphasis on efficiencies and the ability to respond swiftly to the changing needs of our customers has driven this growth. We anticipate that the good momentum the Market Unit finished 2012 with will continue into 2013.


rEvENUE

£872.0m2011: £795.9M (UP 10%)

ProFIT

£96.2m2011: £84.9M (UP 13%)

MArKET UNIT hIGhLIGhTS


Recognition of the Bupa brand in Australia, following the rebrand of MBF, HBA and Mutual Community in 2011, is now higher than these legacy brands. We also won a ‘Your Life Choices’ Award for being the most trusted health brand for over 50s.

In our care services business, we announced in December our intention to acquire ten care homes from Innovative Care, located in Victoria, Queensland and New South Wales, adding more than 1,100 beds to Bupa’s portfolio. This acquisition completed in February 2013 and, as a result, we became the largest private care services provider in Australia with more than 5,600 beds in 60 homes.

hEALTh INSUrANCE Our health insurance business performed well in 2012 with revenue and profits up, driven by strong growth of share in the corporate market and the successful launch of products designed to support families.

In July 2012, the Australian government introduced changes to legislation for private health insurance (PHI), leading to the means-testing of the PHI rebate, a subsidy paid by the government to individuals to support PHI uptake.

The reform caused some customers to become more price-sensitive, a trend that is expected to continue in 2013. Price increases, which are government regulated, were also lower than expected.

Despite some customers downgrading their cover as a result of the rebate reform, the PHI market continued to grow with the Market Unit growing customer numbers by 4%. We achieved a higher share of PHI customer growth than any of our competitors in the 12 months to June 2012.

In Australia and New Zealand, consumer confidence and retail spending continued to weaken. The business environment was further challenged in Australia with reductions by the government in health and social care funding.

This put pressure on our customers’ budgets across our insurance and care services businesses. In this context, our performance was good and customer numbers grew strongly.

We continued to expand our retail presence, opening stores in Gladstone and Brisbane in Queensland and in Sydney’s China Town, providing customers with rapid access to eye care, health screenings, and nutrition and wellbeing advice on the high street.

We are currently in negotiations with the shareholders of Dental Corporation, Australia and New Zealand’s largest dental business, to purchase the business’ 190 clinics, which, when complete, will strengthen and diversify our existing healthcare offer. The transaction is subject to the majority of shareholders voting in favour of a scheme of arrangement.

dean holdenMD of Bupa Australia and New Zealand Market Unit

AUSTrALIA ANd NEw ZEALANdIn a challenging economic and regulatory environment, performance was very strong, with growth in revenue and profit across the private health insurance and care services businesses. In our health insurance business, this was driven by an expansion of corporate business, new products, additional marketing investment and new retail centres. For care services, growth came from the addition of 640 care home beds and 95 assisted living units.

“In both Australia and New Zealand, consumer confidence continued to weaken but our performance was good and customer numbers grew strongly.”

23

STrA

TEG

IC r

EP

or

T


The quality of the business was also recognised when we received an Outstanding Value Health Insurance award at the CANSTAR Awards.

CArE SErvICESGains both in revenue and profit in the Australian business were driven by acquisitions and investment in facilities.

Occupancy remained high, declining marginally by 0.5% to 92.8% (2011: 93.3%) despite growth in resident numbers as a consequence of a significant increase in capacity. We opened a new home in Sydney, adding 144 beds, while our acquisition of two homes in Hobart and Toowoomba added a further 249 beds.

Social care reforms by the Australian government in April 2012 reduced the funding of care services in a bid to limit government subsidies, which placed pressure on margins.

We continued to innovate to improve the care we provide to our residents. We agreed a research programme, in partnership with the University of Tasmania, which will see the introduction of General Practitioners into our care homes in 2013 to provide an enhanced level of care to our residents.

In New Zealand, revenue increased as both capacity and the number of residents grew. Profit growth was helped by higher property investment gains. While occupancy remained high, rates slipped slightly to 92.8% in care homes and 91.7% in villages as capacity grew more swiftly than resident numbers. They still compared very well against the market.

During the year, we acquired a brain injury rehabilitation business, a 65-bed care home, and we continued to invest both in villages and care homes, more than doubling our capital spend to deliver additional capacity at new and existing sites. This spend will increase further in 2013.

oUTLooKIn insurance, we anticipate growth levels to be maintained although we also anticipate continued pressures due to government restraints on price increases and the ongoing impact of customers being more price-aware.

Australian social care reforms announced in 2012 are expected to put pressure on our care services business in 2013. We will continue to invest in developing our portfolio and operational performance while keeping our customers at the centre of everything we do.

In New Zealand, we will invest significantly in organic development in 2013, with a strong focus on developing new sites.

We remain committed to developing our employees through continued investment in qualifications and training.

EXPANdING oUr CArE hoMES NETworK IN AUSTrALIA

In December, we announced our intention to acquire ten new care homes, making Bupa the largest private care services provider in Australia. The care homes, consisting of over 1,100 beds, are located in Queensland, New South Wales and Victoria.

The acquisition, which received regulatory approval in February 2013, followed the purchase of two care homes earlier in 2012 and the opening of a new development, Bupa Bankstown.

Following the acquisition, Bupa’s Australian care services portfolio now consists of 60 homes and more than 5,600 beds across the country.

rEvENUE

£3,554.0mUp 9%

ProFIT

£278.3mUp 12%

CUSToMErS

3.5mUp 4%

EMPLoyEES

10,400


The Bupa Cromwell Hospital delivered double digit growth in revenue due to growth in outpatient services such as diagnostics scans and Cromwell Direct, a new rapid referral service for GPs.

In July, we announced our intention to make a multi-million pound investment to expand our chain of dental centres with the ambition of having 50 dental centres by 2015. The new dental centres will provide high quality, affordable dentistry in major cities.

hEALTh INSUrANCE ANd wELLBEING SErvICESProfits were down due to a decline in customers and higher claims costs. Customer numbers fell 6% to 2.69m (2011 2.87m) while the average claims costs per customer increased by 6%.

Customer satisfaction remained steady in 2012 with 68% of personal health insurance customers rating our quality of service as very good or excellent. BHW also won ‘Health Insurer of the year’ at the Financial Advisor Life and Pensions awards.

During 2012, several new products were brought to market to respond to customer demand for more affordable healthcare solutions. These include Bupa on Demand, a self-pay option for people to access one-off, non-urgent procedures such as hip replacements, and Bupa Business Health Solutions, a low cost suite of products for corporate customers, created to enable businesses to offer more employees the benefits of private healthcare. Products for small and medium-sized enterprises were also enhanced and this segment of the market grew in the last quarter of 2012.

We acted to address market issues and deliver value for money for customers. As well as keeping tight control of our operating costs, we negotiated with hospitals and reviewed consultants’ pay for treating Bupa customers to reflect current complexity of procedures and to champion quality healthcare.

The Competition Commission launched its investigation into the provision of private healthcare in 2012. BHW support this investigation, which has the potential to drive greater accountability among consultants for the quality and value of care they provide, see hospital chains competing also on quality and value, and end the practices that create conflicts of interest for doctors and unnecessarily drive up costs.

Trading conditions continued to be challenging with slow economic growth and sustained public funding pressures on health and social care. Individuals and corporates remained highly price sensitive.

As the leading provider of health insurance, we responded to market issues by innovating with new, more affordable products, and continued to take action to reform the market in an effort to make health insurance more affordable for the long term.

Our care services business remained under pressure as fees from local authorities and Primary Care Trusts largely remained stagnant. A hoped-for government solution to fix the chronic underfunding of social care was not forthcoming in the draft Bill, published in 2012, nor in the government’s response to the ‘Dilnot Commission’ in 2013.

Our Home Healthcare business grew its services as a result of more patients using our medical management, home Total Parenteral Nutrition and home oncology services, firmly establishing us as the UK market leader.

UNITEd KINGdoMChallenging trading conditions continued, adversely impacting customer numbers and profit, particularly in our health insurance business where low consumer confidence, rising healthcare costs and market issues had a significant impact on performance.

richard Bowden MD of Bupa United Kingdom Market Unit

25

STrA

TEG

IC r

EP

or

T


worKING wITh GLASGow CITy CoUNCIL To rEdUCE SICKNESS ABSENCE Glasgow City Council (GCC) is a large organisation, employing directly and indirectly around 36,000 people. In 2008/9, sickness absence accounted for an average of 12.5 days per employee, amounting to a huge cost to GCC.

We began working with GCC in 2010, helping them implement workplace wellness initiatives, rehabilitate those on long-term sick leave, and speed up appointments so staff could access treatment promptly. A year on, sickness absence had fallen to 8.1 days, saving GCC £9m, and in the financial year 2011/12, it fell further to 7.4 days, saving GCC a further £3.4m.

“Our policy isn’t just driven by sickness absence but also a desire to improve staff health, wellbeing and productivity.”

Alan Taylor, Senior HR Officer, GCC

rEvENUE

£2,528.8mUp 1%

ProFIT

£109.7mDown 22%

CUSToMErS

2.8m Down 6%

EMPLoyEES

31,700

CArE SErvICESOccupancy was stable at 87.3% but the business saw a small decline in profit due to inflationary cost pressures which were compounded by below-inflation fee increases from local authorities and Primary Care Trusts, who provide funding to more than 70% of our residents. We also invested £45m to open new homes as well as extend and refurbish existing homes in the portfolio.

In November, we made a commitment to open the first dementia teaching care home in the UK. We were also the first large care home operator to be awarded the Investors in People Gold award for our commitment to develop our people.

We continued to deliver exceptional resident satisfaction scores. 95% of residents rated the quality of care as good or excellent.

hoME hEALThCArE ANd hoSPITAL SErvICESOur home healthcare business saw significant growth in patient numbers as a result of more patients using the core home Total Parenteral Nutrition services and expansion of the home oncology service, owing to strong relationships with consultants.

We announced a partnership with the Co-operative Pharmacy for outpatient dispensing and with BlueBird Care to enable the delivery of domiciliary care alongside home healthcare. We also acquired GEM, a family-run business providing out-of-hospital chemotherapy services for oncology patients. We delivered high patient satisfaction; 95% rated our service very good or excellent.

The Bupa Cromwell Hospital saw double digit growth in revenue as a result of growth in inpatients, day-cases and outpatients, particularly pathological and diagnostic scans.

A new admission service, Cromwell Direct, exceeded expectations with 830 patient appointments booked, generating new revenue. International and consultant revenues also grew significantly.

We achieved high customer satisfaction; 96% of patients said they were likely to recommend the hospital to others.

We opened a lung function laboratory, which has seen month-on-month increases in activity, and a new Women’s Health Centre. We also invested £8.9m on the hospital’s redevelopment.

oUTLooKThe trading environment is expected to remain challenging with continued pressure on funding and cost inflation.

In health insurance, we will focus on customer retention and delivering new products to our core small and medium-sized enterprises and other corporate customers. We will continue to drive the healthcare reform agenda. We also anticipate cost efficiency savings as a result of operating within the Market Unit construct.

In our care services business we will focus on investing in our staff to ensure we continue to provide excellent care. We will also open three new homes, providing a platform for profit growth over the coming years.

We will position our Home Healthcare business to take advantage of NHS healthcare reforms designed to reduce costs and increase care at home, where we know people prefer to be treated. We will leverage new technology to improve efficiencies and create new propositions.

We also have plans to invest in the Bupa Cromwell Hospital to become a leader in oncology, cardiac services, paediatrics and complex surgery.


Partner Programme was praised by the leading business magazine, Actualidad Economica, as one of the Most Innovative Ideas in Spain.

We established an early-diagnosis dementia team while a new ‘Customer Eye’ programme was created to focus solely on improving the customer experience in our care homes and making them feel more homely. Over £1m was invested to refurbish interiors and gardens.

The Avedis Donabedian Foundation, part of the University of Barcelona, awarded Sanitas an Excellence in Quality prize for the quality, management and service of care homes.

Our Public-Private Partnership (PPP)with the regional government of Valencia performed well as did our dental business, where growth was driven by the rapid expansion of clinics and the launch of a new low cost product.

In December, we secured a second major PPP in Spain with the acquisition of 50% of the 250-bed Torrejón hospital in Madrid. We will be responsible for the medical management of the hospital for the community for a 30 year period, serving a population of 138,000.

In October, we established a new business unit, Latin America Domestic. We are developing a domestic market strategy for Latin America and will explore opportunities in 2013.

hEALTh INSUrANCE We performed well with a double digit growth in profit, adding more than 44,000 health insurance customers. Growth was driven by the launch of a suite of more affordable products targeting specific customer segments. Other drivers of growth included an effective customer retention strategy, and the enhancement of our multi-channel sales model.

hoSPITALS ANd ProvISIoN Profit growth was strong, driven by the integration of our funding and provision services, which offers differentiation in a highly competitive market.

The benefits of the Spanish integrated model were also seen through increasing numbers of insurance customers using CIMA, our private hospital in Barcelona, acquired in 2011. We boosted our expertise at the hospital in thoracic surgery, oncology and haematology.

The economic environment in 2012 was very tough. Unemployment in Spain reached 25% and government austerity measures impacted health and social care funding. our performance demonstrates the strength of our integrated model which differentiates us in a highly competitive market, keeps costs affordable and service quality high.

Excluding the impact of foreign exchange movements, our revenue grew by 5% and customer satisfaction scores improved across all of our Spanish businesses compared to 2011.

A new centre was opened in Alcobendas, a suburb of Madrid, offering customers both wellbeing and medical services in the same location for the first time. This approach allows shared service synergies to be realised between these two business areas.

We expanded the Healthcare Partner Programme, offering customers a differentiated set of services, beyond cardiology, gynaecology and new baby checks-ups. We now include young children, adolescents and men to help support customer retention, drive activity across hospitals and operate as a leader in prevention. The Healthcare

SPAIN ANd LATIN AMErICA doMESTICDespite a tough economic environment, performance was strong, with continued growth in customers and profit. Growth in health insurance was driven by successful product launches, an effective customer retention strategy and ongoing management of medical costs. Higher levels of activity in our three private hospitals and 17 medical centres reflects our differentiated service.

Iñaki Ereño MD of Spain and Latin America Domestic Market Unit

27

STrA

TEG

IC r

EP

or

T


NEw PUBLIC-PrIvATE PArTNErShIP IN SPAINIn 2012, Sanitas took on the management of the 250-bed Torrejón Hospital on behalf of Madrid’s regional government.

The PPP covers 138,000 people living in Madrid and the surrounding region for a 30 year period. The deal will build on the success of Sanitas’ PPP in Valencia, which has demonstrated that public-private collaborations can reduce healthcare costs while maintaining and advancing the quality of the service.

rEvENUE

£1,190.8mDown 2%

ProFIT

£113.4mUp 7%

CUSToMErS

2.6mUp 28%

EMPLoyEES

8,400

second half of 2012, Sanitas opened a total of 41 additional dental centres taking the total to 112.

CArE SErvICES A decline in public expenditure on social services due to austerity measures put pressure on the business but revenues remained stable as a result of an increase in occupancy. Profits decreased marginally due to an increase in operating costs.

Occupancy increased as the business continued to focus on differentiation and attracting more self-funded residents in response to cuts in public funding, although the self-pay market was also depressed.

oUTLooKWe expect the economy to continue to struggle, with record highs in unemployment unlikely to improve quickly. We will focus on consolidating and leveraging the strength of our existing provision to generate growth in contribution and new customers amid increasing competitive pressure and government austerity measures.

For our health insurance business, we will focus on retaining valuable customers and maximising efficiencies from our multichannel sales model, complementing this with new, more affordable propositions.

For our hospitals and provision businesses, we will develop customers’ understanding and appreciation of our healthcare excellence and utilise our new services to deliver more services to customers.

Following the success of Dental XXI, we will continue to grow our non-private medical insurance customer base while expanding our dental provision to increase the number of owned dental centres.

Regarding the Latin American Domestic market, we will explore opportunities for our participation in this region during 2013.

Activity at La Zarzuela and La Moraleja hospitals in Madrid increased following investment in technology, refurbishment and services expansion. At La Moraleja hospital, we opened a new dermatology unit.

Our PPP with the regional government of Valencia continued to perform well, with the hospital extending its services to serve citizens better and attract more patients from outside the locality. Tight cost control also enabled the business to improve profitability while improving clinical outcomes, such as better control of chronic conditions compared to 2011.

In May, we opened a paediatric neuro-rehabilitation centre, attracting acclaimed medical practitioners to Manises. In December, we acquired the remaining 40% minority stake in the hospital.

dENTALMore than 183,000 dental insurance customers were added in 2012, driven by the launch of a new low cost product, Dental XXI, the development of new sales channels, and the expansion and improvement of our existing dental centres, which also drove sales. In the


In December 2012, we announced, subject to regulatory approval, our intention to acquire LUX MED, the largest private healthcare provider in Poland, to deliver on our strategy of delivering more affordable, accessible healthcare.

ArABIAOur associate company in Saudi Arabia grew revenue, profit and customer numbers as a result of expansion in the field sales force. This was despite a very challenging year in which aggressive competition pushed prices downwards.

We opened five new retail outlets and new products were launched, aimed at families and domestic workers, such as drivers and maids.

We also won several awards, including Best Company to Work For for Women in Saudi Arabia, and Best Call Centre in the Middle East.

INdIAOur joint venture with Max India grew revenues and customer numbers as a result of improved sales management and productivity. We won the right to provide health insurance to the population of two health districts under a government scheme. Nine small branches opened and Max Life Synergy, a pilot partnership in which our representatives were based in our partner’s, Max Life, offices, was expanded to 25 locations following initial success.

hoNG KoNGHong Kong delivered a strong performance driven by growth in corporate customers, as the buoyant economy saw companies expand their workforce, boosting the number of lives covered. For individual customers, new more flexible product options

revenues and profits grew strongly in Thailand and hong Kong, where double digit growth in customer numbers was driven by significant contract wins and growth in corporate customers. our joint venture in India achieved a material increase in customer numbers and won contracts to provide micro health insurance products to low-income people as part of a government partnership. Bupa Arabia, our associate company in Saudi Arabia, continued to grow customer numbers in an increasingly competitive market. our health coaching and analytics business faced continuing challenges from the changing healthcare landscape in the USA.

We have a strong focus on the healthcare needs of customers in emerging economies, utilising our experience from developed markets. Our healthcare expertise is a key driver of growth as it differentiates us from local market competitors who are primarily multi-line insurers.

Our insurance business saw a 24% increase in customer numbers, driven by our healthcare expertise and international reputation in customer service and delivery.

INTErNATIoNAL dEvELoPMENT MArKETSOur insurance businesses delivered strong growth in customers and revenue across our markets, but we saw an overall decline in performance due to challenges faced by our health analytics business in the USA.

Alison Platt MD of International Development Markets Market Unit

“Bupa’s healthcare expertise is a key driver for growth – it differentiates us from local market competitors who are primarily multi-line insurers.”

29

STrA

TEG

IC r

EP

or

T


dEvELoPING oUr MICro hEALTh INSUrANCE oFFErINGBuilding on the experience we have gained in India, we are now developing a range of micro health services to enable low income consumers to access high quality care at prices they can afford.

This includes the creation of new micro health insurance models that can be delivered with strategic partners. We are designing commercially sustainable, low cost models with the potential to be taken to scale across multiple geographies.

This will create the opportunity to reach millions more people with quality healthcare, in line with our Bupa 2020 ambitions.

rEvENUE

£227.3mDown 7%

ProFIT/(LoSS)

£(11.5m)Down 26%

CUSToMErS

2.2mUp 24%

EMPLoyEES

800

performed well. Brand awareness reached 84% and customer satisfaction hit an all-time high of almost 80%.

ThAILANdRevenue and profit were up due to double digit growth in customer numbers driven by significant contract wins and improved retention.

Revenue from smaller companies increased significantly due to our development of a new product package and a restructure of our sales process.

hEALTh ANALyTICS (USA)Revenue was significantly down as a result of large regional insurers in-sourcing disease management. We continued to build our Total Population Health solution through a partnership with Limeade, a leading provider of online wellness, which helped client retention in some areas. The programme gives employers the opportunity to target each employee with tailored, relevant health solutions from online exercise tips to intensive telephone coaching support.

We are piloting a programme with clients to deliver health coaching in the provider setting rather than through insurers.

oUTLooKIn 2013, we will continue to focus on development opportunities in new markets and continued growth in existing markets, directly supporting our vision to become a healthcare partner to millions more people around the world.

In Arabia, we anticipate continued improvement despite expectations that the market will remain challenging.

We anticipate sustained growth in Hong Kong in 2013 and will invest in brand awareness activity, improvements to the customer experience and in operational efficiencies.

Sustained growth is expected in Thailand and we will continue to invest in service improvements and our healthcare partner initiatives.

We anticipate continued growth in India and we will maintain our focus on delivering a market-leading service experience.

In the USA, pressures from large regional insurers who are in-sourcing disease management are expected to continue to impact our health analytics business. We will focus on meeting the changing needs of our customer base, and we will pilot a programme to deliver our services in the provider setting.

We will continue to focus on business development in China and channel the appropriate resources required to support ongoing operations.


“We continued to expand our network of assured hospitals, helping to drive up clinical quality in the countries in which we operate around the world.”

we operate around the world. The programme has now assessed 100 hospitals in 23 countries and increasingly we are seeing hospitals in developing countries look to us for guidance on raising quality and measuring clinical outcomes.

We invested in infrastructure to improve our online sales capability with the launch of our Quick Quote website in October, making purchasing products through tablet and mobile devices possible.

We also delivered a new administration system to improve the efficiency and scale of our 24/7 medical support service which enables patients to be evacuated and repatriated wherever they are in the world to a country where they can receive high quality healthcare.

We won The International Assistance Group award for our Lifestraws programme, which supplies portable water filtration devices to families in Kenya for each sale of a Vital Africa product, an emergency-only policy for people working in Africa.

A claims service centre in the Dominican Republic was established to improve customer service and reduce operating costs.

INTErNATIoNAL MEdICAL INSUrANCEWe delivered a strong performance as a result of rapid growth in individual and corporate customers, a new partnership in Libya and expansion into new territories, working with businesses in the International Development Markets and Australian Market Units.

Customer loyalty and retention remained major themes for the business. Investment was made in creative customer communications, we launched

we proved particularly successful in 2012 at responding quickly to the healthcare needs of an increasingly mobile workforce. Continued investment in operations included the roll out of new sales offices and the launch of a marketing campaign in Mexico.

Customer loyalty and satisfaction scores for our international private medical insurance (IPMI) continued to improve throughout 2012 and in Latin America they increased for a third successive year with 74% of customers rating service as very good or excellent, reflecting the overall investment and improvements in service delivery.

We launched Bupa Flex, allowing customers to buy IPMI for a period of less than a year, the usual minimum policy length.

A series of specialised products and services were also introduced for small and medium-sized businesses in the oil and gas, maritime and exploration sectors.

We continued to expand our network of assured hospitals, helping to drive up clinical quality in the countries in which

INTErNATIoNAL PMINew partnerships, the development of innovative products, enhanced direct sales capability and improved customer service drove very strong growth in revenue, profit and customer numbers in Asia, the Middle East and North Africa.

robert Lang MD of International PMI Market Unit

31

STrA

TEG

IC r

EP

or

T


rAPId GrowTh IN LIByALibya became one of Bupa International’s biggest markets in 2012 with 40,000 customers.

This has been achieved in partnership with Sahara Insurance Company. With them, we targeted local Libyan businesses and started to attract multinational companies back to Libya by providing high quality medical cover.

The partnership attracted 18,000 new customers during 2012.

rEvENUE

£872.0mUp 10%

ProFIT

£96.2mUp 13%

CUSToMErS

0.7mUp 5%

EMPLoyEES

1,600

a Bupa Rewards programme that offers health-related gifts at renewal, and online claims processing was improved.

LATIN AMErICAWe delivered a good performance in a very competitive market while continuing our strong development agenda, which is focused on improving customer service and entering new markets.

During 2012, we launched a new website offering health and wellbeing information as well as interactive guides to Bupa products, which generated additional sales in the months following the launch.

oUTLooKThere was good momentum towards the end of 2012 and we expect this to have a continuing positive impact in 2013.

We will continue to bring focus to new product propositions and local partnerships to ensure we continue to meet our customers’ needs.

We anticipate growth from our international private medical insurance business as we continue to invest in new offerings to meet the needs of our customers where the focus is increasingly on affordable healthcare.

In Latin America, we will maintain our focus on investing in new products and in increasing access to our markets to support growth, particularly in Mexico, where we will introduce new products and further distribution channels.

New management teams have been introduced into Ecuador, Bolivia and the Dominican Republic operations with new product launches planned for 2013.

Pursuit of further new market entries are also being planned for 2013.


LEAdErShIPEmbedding this mindset in our culture begins with our most senior people. In 2012, we initiated a programme based around a philosophy of “breakthrough leadership”. The concept behind it is the transformation of how both individuals and teams lead in the relentless pursuit of outcomes in service of our purpose.

As part of the programme, we invested in 200 of our most senior leaders, building capability in breakthrough leadership via residential programmes, coursework, workshops and coaching. We have introduced a biannual performance diagnostic to provide leaders with insights into the environment they are creating for breakthrough thinking and performance.

We are also creating an aspirational profile describing the leadership it will take to deliver Bupa 2020 which we will align to our leadership effectiveness and development efforts, along with reward and talent management.

CoMMUNICATIoNDelivering our purpose requires all of our employees to connect with our vision and see the part they can play in delivering it. To do that, we created a range of communication and discussion tools to help team leaders share the vision with their teams through two-way dialogues.

This approach is part of a wider step-change in how we engage our people. Throughout the business, we are striving to build and embed a breakthrough culture where everyone contributes to our growth and development.

Also in 2012, we administered a new version of our online employee survey – the Global People Survey (GPS). It allows our whole workforce to contribute to the conversation about our future and suggest areas where we can improve. Insights provided by employees are now driving changes to enhance our overall performance.

MAKING AN IMPACT IN oUr CoMMUNITIES Our people do incredible things in the communities in which they work. In September, as part of our Well World programme, the Bupa Global Challenge saw 97,000 people put on their walking shoes to improve physical and mental health and boost environmental sustainability.

we are proud of the affinity our staff have with Bupa’s purpose and the customer care our people provide every day. we are committed to building on this foundation to cultivate a truly extraordinary culture and organisation so that we can reach millions more people in more places, fulfilling our purpose.

Our new vision is shaping our culture – how we lead, how we communicate and how we work with each other and our partners.

CULTUrE Our culture will facilitate and reflect our ambitions. We have been working with our people to foster a mindset of “possibility and accountability”. This is about creating a culture in which our people are empowered to explore new ways of doing things and to work collaboratively to achieve better outcomes which they ‘own’.

The ultimate goal is always our purpose – having all our people fully aligned behind delivering it, seeing how their role contributes, and knowing that they can change how we do things to make us more effective and efficient.

oUr PEoPLE We are a people-based organisation. We are investing in, and developing, our people to realise our ambitions and we are working to create an extraordinary culture and organisation where people love to work.

Denise collisChief People Officer

33

STrA

TEG

IC r

EP

or

T


All our businesses engaged their communities with the walking challenge, from a walk along sections of the Great Wall of China to a Walkathon in India.

Bupa Latin America and the Caribbean coordinated eleven events across five cities in five countries and Care Services UK partnered with Alzheimer’s Society and Alzheimer’s Scotland to engage local communities in Memory Walks.

Smartphone apps were developed for Bupa Hong Kong and Bupa Arabia to encourage colleagues, customers and other walkers to track their progress.

dIvErSITy ANd INCLUSIoN Our inclusive approach makes us a more effective organisation and we are proud that a third of the Bupa Executive Team is female. Our efforts were recognised in Saudi Arabia this year by the Minister of Labour as an exemplar for recruiting and developing Saudi national women.

We are committed to treating all our people fairly and with respect, making decisions for recruitment, training, development and promotion on ability and aptitude, and giving all people equal opportunity regardless of gender, ethnic origin, physical or mental ability, sexual

orientation or any other individual characteristic.

wELLBEING, hEALTh ANd SAFETyAs a healthcare business, we intend our people to be healthier because they work for Bupa. To do that, we need to ensure their safety at work and enable them to live healthier lives.

During the last year, we have strengthened our Wellbeing, Health and Safety capability and processes. Board member, Professor Sir John Tooke, assumed the role as Champion for Wellbeing, Health and Safety and in March we appointed a new Global Director of Wellbeing, Health and Safety and Diversity.

Changes were implemented in the Health and Safety management system, controls and governance. Leading and lagging indicator scorecards were introduced across all businesses and a global audit was conducted by Marsh Consulting across 15 locations and eight businesses. Findings included good compliance to local legal requirements and evidence of strong leadership.

In 2012, there were 3,889 employee incidents and 115 RIDDOR1 incidents, equating to incidence rates (per 100 hours) of 7.9 and 0.23 respectively, which is an improvement on our incidence rates in 2011.

hEALThIEr worKING AT BUPAWe have implemented numerous initiatives around the world to help our people to be healthier, including:

° In the UK, we rolled out ‘Positive Health’ in partnership with Diabetes UK and Bupa Health Coaches. 1,390 employees participated and over 1,000 diabetes risk assessments and cholesterol tests were conducted.

° Bupa Care Services New Zealand achieved 50% engagement in its ‘B-fit’ programme, designed to help staff make healthy choices.

° 80% of Health Dialog staff engaged in Wellness Dialog. The programme combines health assessment and one-to-one coaching to support employees to be healthier.

EMPLoyEE ENGAGEMENT INdEX

72%(Favourable)

75%(Favourable)

Engagement is when our people understand and feel holistically connected to our purpose and are motivated to contribute to Bupa’s success.

PErForMANCE EXCELLENCE INdEX

72%(Favourable)

75%(Favourable)

Performance excellence is our people’s perception of our commitment to delivering exceptional products, services and healthcare to our customers.

1 Within the UK, the ‘Reporting of Injuries, Diseases and Dangerous Occurrences Regulations 1995’ require more serious categories of incidents and accidents to be reported to the Health and Safety Executive or to Local Authorities.


Risks are measured in terms of significance to the business and its stakeholders in the context of Bupa’s strategy, its operations and the Board’s risk appetite.

A top-down, annual assessment of our key risks was led by the Chief Risk Officer in January 2012. This was supplemented by quarterly, bottom-up risk assessments across the whole portfolio to produce reports which are shared with relevant management committees and the quarterly Bupa Risk Committee.

The principal role of the Committee, as detailed in the annual Director’s Statement, is to assist the Board in its leadership and oversight of risk across the Group. This includes understanding and, where appropriate, optimising the current risk exposures and the future risk strategy, determining overall risk appetite and tolerances, building the risk management framework, including risk policies, process and controls, and the promotion of a risk awareness culture throughout Bupa.

2012 KEy dEvELoPMENTSWe continually seek improvements to our Risk Management Framework and outputs generated to ensure it remains relevant. Activities in 2012 focused on:

1. Creating a Bupa risk CommitteeDuring 2012, we split the Audit, Risk and Compliance Committee into two Board sub-committees, namely the Audit Committee and the Risk Committee. This took effect from June.


2. refreshing the risk Management FrameworkChanges to the framework made during the year included:

° implementing revised assessment scales to take account of the size of each of our businesses;

° reviewing the “detailed risk category model” to ensure continuing relevance and consistency across Bupa; and

° aligning with other governance improvements made, including linking with the Bupa Governance Policy suite and capital assessments.

3. A new global risk Portal We have a network of Risk Managers around the world who drive improvements in risk culture and assessments within the businesses.

The Bupa risk Management Framework is approved by the Board and outlines Bupa’s approach to risk management across Market Units, businesses and the Corporate Centre. The risk team, led by our Chief risk officer, reports to our Chief Financial officer.

rISK MANAGEMENT FrAMEworK At the heart of the framework is the requirement for the functions to identify and quantify periodically the key risks they face and to assess the effectiveness of control strategies to mitigate them to an acceptable level.

rISKS ANd UNCErTAINTIESWith a broad portfolio and a global reach, Bupa’s risks are diverse and complex. But we do not think just in terms of the financial risk to our business. Our focus is on the millions of people who trust us to care for them and the thousands of people in our organisation who provide customer support at all levels.

Mo

nito

r

Identify

Assess

Control Measure

Quarterly risk Assessment

risk Management FrameworkEvelyn Bourke Chief Financial Officer

35

STrA

TEG

IC r

EP

or

T


AUSTrALIAN BrANd MIGrATIoNWhat happened?Due to growth through acquisitions, Bupa Australia was operating under three brands – MBF, HBA and Mutual Community. The strategy was to migrate to our lead brand, Bupa.

What were the risks?The three existing brands held considerable equity. MBF alone was valued at £57.3m. The risk was that the brand roll out would fail to gain traction with consumers and impact customer numbers and business growth.

How were they managed?A dedicated, cross-functional project team was created, overseen by the local Executive Leadership Team. Implementation of the strategy was phased to allow the team to incorporate lessons learnt into the process. The initial focus was on a campaign to associate the existing brands with the Bupa brand. Regular assessments of brand awareness were performed to monitor the programme. The Bupa Risk Committee received frequent progress reporting through regular Risk reports.

In 2012, we implemented a global Risk Portal. This application facilitates quicker reporting of risks and includes enhanced analytic tools. It further allows close monitoring of key risks and the actions to mitigate them. During the year, we reviewed the effectiveness of Bupa’s risk management arrangements via a maturity assessment and provided the results to the Bupa Risk Committee for recommended actions.

4. Annual review of our risk appetiteOur risk appetite is defined by the Board in a set of risk appetite statements. These statements are reviewed annually with regular reporting to the Risk Committee of performance against each individual statement. The key elements of our risk appetite show a keen focus on our financial strength, risk exposures and the provision of high quality service to our customers:

° Economic Capital: we maintain a prudent capital buffer such that we have a high degree of confidence that we have sufficient capital to meet our liabilities in extreme scenarios.

° Funding and Liquidity: the Board requires that at all times sufficient facilities are available to fund the operations of the Group and to meet obligations as they fall due.

° Operational Activities: the Board requires businesses to put in place appropriate processes, systems and trained staff to prevent customer detriment, reputational damage, adverse regulatory and legal scrutiny or financial consequences due to operational activities.

We have in place detailed qualitative statements and preferences to support these statements, which are accompanied by a suite of governance policies and guidance.

As our business funds and delivers healthcare, the inherent risks we manage vary considerably.

The key risks we face, along with mitigating actions, have been mapped against our six risk categories, namely: Strategic Risk, Financial Risk, Commercial Risk (Insurance), Commercial Risk (Non-Insurance), Operational Risk and Clinical Risk.

“By understanding our risks and managing them effectively we can be confident that we will meet our strategic objectives.”


Trend within year

description Mitigating activity

Strategic risk

Business environmentMany governments are reviewing policies on healthcare provision and the role of the private sector, which may impact Bupa in a number of geographies and sectors.

The geographic spread of our operations reduces our exposure to significant changes in government healthcare policy within any one country. We actively monitor the changing political environment across all areas of operation and, where possible, engage with relevant governments.

Economic market conditionsChallenging economic conditions, particularly in Europe, increase the risk we face. Rising inflation, prolonged periods of low interest rates, credit rating reductions for investment counterparties and reduced GDP can impact our businesses and investment strategies.

We seek to minimise the impact of external economic events through the diversified nature of our operations. Our governance structures and policies seek to protect the business from excessive exposure to specific external risks while seeking to achieve growth targets. Management teams are responsible for considering the potential impact of macroeconomic events in terms of impacts on individual business plans, including the use of stress testing to consider potential consequences of specific events.

ExpansionRapid growth into new markets and expansion in existing markets exposes us to new potential financial, regulatory and reputational risks.

All major acquisitions and strategy decisions are approved by the Board. The decisions are supported by thorough due diligence and consideration of the impact on our operations in line with our Mergers and Acquisition policy. We seek to integrate acquisitions into existing management and governance structures within the first 100 days to enable appropriate oversight and control.

Financial risk

Capital and solvencyAgainst the backdrop of changing regulations, there is a risk that we could be required to hold more capital which could otherwise be used to fund growth.

The Bupa Group and our individual insurance legal entities seek to maintain a prudent buffer over and above the regulatory capital requirement. This amount is regularly reviewed in light of regulatory changes, economic conditions and the effect of ongoing business activities.

InvestmentFailure to manage financial assets (valued at £3.56bn) effectively could result in a financial loss and reduction in Group solvency. We hold a small return-seeking portfolio which is exposed to market volatility.

Most of the investments are centrally managed by Corporate Centre Finance under the supervision of the Treasury and Investment Committee, chaired by Evelyn Bourke. Most of the investments are held in cash; exposure to individual counterparties is restricted. The widespread downgrading of financial institutions has required us to accept deposits being held with institutions whose two credit ratings are below AA-/Aa3 by the major credit rating agencies. The Treasury and Investment Committee addresses these breaches on a case-by-case basis in order to maintain a balanced portfolio. The return-seeking asset portfolio is managed within a risk budget framework using Value at Risk methodology.

FundingWe need to maintain good access to a variety of funding sources to ensure that short-term and long-term liquidity is maintained to support current operations and future growth.

We commit to maintaining an appropriate level of undrawn headroom through an £800m committed bank facility which was successfully refinanced in 2012. In addition, we have access to a variety of debt capital markets including the senior and hybrid bond markets. We are committed to maintaining an appropriate investment grade rating and we continuously monitor key financial ratios, such as gearing and interest cover.

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

Decreasing trend in 2012

Increasing trend in 2012

Static trend in 2012

rISKS ANd UNCErTAINTIES CoNTINUEd

37

STrA

TEG

IC r

EP

or

T


Trend within year

description Mitigating activity

Commercial (Insurance)

Insurance riskUnexpected variations in claims can lead to reductions in financial returns. Factors affecting insurance risk include macroeconomics, medical inflation, demographic shifts, changes in population health, developments in healthcare delivery and technology, and statistical fluctuation.

The Group manages its insurance risks by the use of advanced analytic models of products, pricing, and sectors, controls on underwriting and claims settlement, policy clarity and contract certainty, internal and external actuarial reviews and, in respect of US claims, the use of reinsurance to transfer risk. The Group’s insurance business is for short-term medical costs, enabling regular re-pricing in the event of changes in claims trends.

Provider costsIn the face of inflationary pressures, there is a risk that increasing provider charges will lead to substantial increases in premium rates and customer dissatisfaction.

Our policy is to work with our providers to maintain and improve quality while containing the cost of procuring medical services. This includes, where possible, the use of contracts, preferred supplier arrangements and case management techniques. In more established markets, we can leverage our market position to drive efficiency.

CompetitionEffective competition among healthcare providers is essential for controlling price inflation. Failure to secure competitive medical services leads to higher premiums. The UK’s Competition Commission’s is currently investigating the private healthcare provision market.

We welcome any activities that promote healthy competition and seek to work with the authorities to secure a fair outcome. In the UK, we recognise that the Competition Commission investigation is necessary to secure the long-term sustainability of the private healthcare market. We continue to submit data and information to the investigation and await the publication of the provisional findings in 2013.

Commercial (Non-Insurance)

Pricing and utilisationA significant proportion of revenues for our care services businesses comes from the government. Expenditure cuts increase pressure on our ability to achieve desired utilisation rates and pricing targets.

In order to limit our exposure to lower occupancy rates and fees, we are targeting the private market to achieve a higher conversion rate and increased fees per bed.

operational

regulatoryChanges in financial, clinical and health and safety regulations in any of the countries where we have customers can affect the way we carry out business, increase costs or reduce revenues.

We operate to high regulatory standards and maintain an awareness of and, where possible, seek to anticipate regulatory change. Our principal financial regulator is the UK Financial Services Authority, with which our senior managers and directors maintain a close working relationship. They seek to maintain strong relationships with all local regulators.

Change managementWe have an ongoing development programme to drive improvement in products and services. Should these changes be managed ineffectively, the risk of failure to deliver the intended benefits may be increased.

We mitigate the risk inherent in change by having stringent change management procedures. Major project expenditure on new developments is approved by the Board following rigorous assessment. Professional programme management resources are used and the internal audit function reviews the impact of major changes on operational controls. Progress on key projects is reviewed by the Risk Committee.

Information technologyOur services are underpinned by IT systems and infrastructure. System failures may impact products and services or risk information security breaches. Lack of integration of systems across the Group could also impact operations and profits.

We have a number of dedicated IT teams who are responsible for the development, maintenance and monitoring of IT services. We have a dedicated information technology risk management function which monitors and manages specific risks across the information technology estate, reporting to both senior management and Group Risk on a routine basis. We continually undertake work to integrate systems and in 2012, a “cloud” based platform to host applications globally was launched.

Business continuityThe geographic diversification of our operations significantly increases our exposure to business disruption, natural disasters and other catastrophic events.

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

Clinical

Clinical governanceWe are dedicated to evidence-based best practice and high patient safety and clinical standards. Failure to fulfil these obligations could have significant financial, regulatory and reputational impact.

All Market Units have a Medical Director responsible for ensuring clinical quality and governance within the business. They are professionally accountable to the Chief Medical Officer (CMO) for clinical governance; the CMO is a member of the Bupa Executive Team and is the senior manager, independent from the businesses, with overall responsibility on behalf of Bupa for the oversight of systems and controls relating to clinical governance. The Board has a Medical Advisory Panel (MAP) chaired by Professor Sir John Tooke, which advises it on medical issues and considers external perspectives from a number of leading clinicians and health professionals to help inform and develop our approach.

Bupa annual report 2012 governance rePorT

38

Chairman’s introduCtion to governanCe Bupa’s structure enables us to focus on long-term strategy and sustainable growth.

our corporate structure is special. We were founded in 1947 as a company limited by guarantee with no shareholders. this structure has served Bupa well since then, enabling us to focus completely on the original objects to “prevent, relieve and cure sickness and ill health of every kind”. today these objects are expressed in our purpose as “longer, healthier, happier lives” with Bupa’s structure continuing to underpin its exclusive focus on delivering that purpose.

We recognise the importance of good governance and we aim to operate to standards of governance expected of large, global public companies. Bupa complies with the UK Corporate Governance Code and associated guidance. We continually review our governance arrangements in line with changes in best practice. With no shareholders, the role of the Bupa Board is even more material from a Governance perspective. The Board comprises eight independent Non-Executive Directors and two Executive Directors. Bupa has around 100 Association Members who are independent and hold the Board to account. These Association Members

fulfil a critical oversight role, providing challenge to the Board on matters of strategy and performance as well as business focus and development.

2012 developmentsAs part of our commitment to applying sound corporate governance principles, we improved our governance systems and structures where appropriate and necessary to keep up to date with emerging best practice. In 2012, we separated the Audit, Risk & Compliance Committee into individual Audit and Risk Committees with clear, distinct remits and different chairmen. This enables each committee to focus fully on its particular remit. There is common membership across both committees to avoid overlap and duplication in their activities and ensure that they operate effectively. The activities of each Committee are reported on pages 46 to 58.

Also, in 2012, all Directors put themselves forward for re-election by the Association Members. We will continue this practice of annual re-election.

Finally, this has been a year of change for Bupa with Stuart Fletcher joining as our new Chief Executive Officer in March and Evelyn Bourke as our new Chief Financial Officer in September. I am delighted to see the impact they are both making in bringing their experience to bear on best practice governance at Bupa.

the FutureBupa’s policy is to seek continual improvement in governance arrangements and this will continue in 2013. During 2012, the Board as a whole considered Non-Executive Director succession and set out succession plans up to 2015, which will ensure an orderly transition and ensure continuity when Non-Executive Directors come to the end of their tenure.

° one Director is scheduled to retire in 2013;

° a new Senior Independent Director will be appointed on 1 May 2013;

° two Directors are scheduled to retire in 2014; and

° one Director is scheduled to retire in 2015.

The recruitment of successors for appointment in 2013 is now under way.

We will also conduct our second externally facilitated Board evaluation in 2013, the results of which I will share with you in the 2013 Annual Report.

lord leitch Chairman


39

go

ve

rn

an

Ce

re

po

rt

statement oF ComplianCeOur stated aim is to operate with the same governance standards as any FTSE 100 company. I am pleased to report that we have applied the main principles, and have complied with all of the relevant provisions, of the UK Corporate Governance Code published in June 2010 (the “Code”) throughout the year except Code Section E: Relations with Shareholders, which is not wholly applicable for a company without shareholders.

improved oversight oF risKWe decided to split the Audit, Risk & Compliance Committee into separate Audit and Risk Committees in early 2012.

This change was implemented in the summer and the two new Committees held their first meetings in June 2012.

The Risk Committee, chaired by Lawrence Churchill, focuses on risk management frameworks and risk appetite and provides oversight on risk management practices deployed in the business.

The Audit Committee, chaired by John Lorimer, focuses on reviewing accounting policies and financial statements, the provision of both internal and external audit and overseeing the effectiveness of the internal control framework.

remCo revieWThe Remuneration Committee commissioned an externally facilitated review of the current executive remuneration arrangements and processes to determine their effectiveness and alignment with Bupa’s strategy and goals.

The review found that the overall reward structures were broadly in line with market practice with some improvements in the design of remuneration structures being recommended.

“Bupa exists for the benefit of its customers – present and future.”

We recognise the importance of maintaining effective relationships with our Association Members. In keeping with the full spirit of the Code, great effort is made to engage fully with our Association Members, particularly through the constructive use of the AGM each year and briefing sessions organised each Autumn. We ensure that Association Members are kept informed of strategy and performance and that their views are communicated to the Board. The publication in September 2012 of revisions to the Code have also been taken into account when considering compliance with the Code and what action would be needed to enable Bupa to comply with these new provisions, as appropriate, into 2013.

This report, together with the Remuneration report on pages 52 to 58, describes how we have applied the main principles of the Code during the year.

lord leitchChairman


40

NON-EXECUTIVE CHAIRMAN

1. lord leitch, Chairman N(Chair)/Re

Joined the Board in May 2005; appointed Chairman in November 2006. 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. Currently Chairman of Intrinsic Financial Services, Chancellor of Carnegie College and member of the House of Lords. Lord Leitch has a deep and broad knowledge of insurance and financial services gained over 40 years as a senior executive in a number of major international businesses.

SENIOR INDEPENDENT DIRECTOR

2. peter Cawdron Re(Chair)/A/N

Joined the Board in May 2007; appointed Senior Independent Director in January 2009. Peter is a former Chairman of Punch Taverns plc and has held non-executive director roles at ProStrakan Group plc, The Capita Group plc, Compass Group plc, ARM (Holdings) plc, Johnston Press plc and GCap Media plc. Previously the Strategy Director for Grand Metropolitan plc, Peter is a chartered accountant and has considerable financial and business expertise gained over many years, with in depth knowledge of audit, strategy, marketing and brand development.

EXECUTIVE DIRECTORS

3. stuart Fletcher, Chief executive officer N/M

Appointed CEO in 2012. Stuart joined from Diageo where, most recently, he was President of Diageo International. Other senior management positions at Diageo include Global Finance Director of Guinness. Previously, he held financial

roles at Procter & Gamble and United Glass. Stuart has over 25 years’ experience in senior management and a strong international track record. He is accomplished in setting and executing growth strategies, developing strategic partnerships and embedding employee engagement and team capability development across complex and international businesses.

4. evelyn Bourke, Chief Financial officerAppointed CFO in October 2012. 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. A qualified actuary, Evelyn is also a non-executive director of the IFG Group in Ireland. Evelyn has a strong track record and extensive experience in financial services, risk and capital management, operations, and mergers and acquisitions.

INDEPENDENT NON-EXECUTIVE DIRECTORS

5. lawrence Churchill, CBe Ri(Chair)/A

Joined the Board in July 2009. Lawrence is Chairman of the NEST Corporation and Chairman of the board of the Financial Services Compensation Scheme. Previously Chairman of 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. Lawrence brings considerable expertise from operating in large, complex organisations and has extensive knowledge of financial services, risk management, general management and public policy.

6. professor sir John tooke M(Chair)

Joined the Board in July 2009. A consultant physician, Sir John is President of the Academy of Medical Sciences and holds a number of positions at University College London, including Vice-Provost (Health), Head of the School of Life and Medical Sciences and Head of the Medical School. Currently non-executive director of UCL Hospitals NHS Foundation Trust. Sir John brings his medical expertise, gained over 40 years, to advise the Board on clinical governance and advances in healthcare practices and treatments.

7. rt hon Baroness Bottomley, dl N/M

Joined the Board in May 2007. Baroness Bottomley is Chairman of the Odgers Berndtson Board and CEO Practice and a non-executive director of Smith

the Board oF direCtors

& Nephew plc. Currently Chancellor of the University of Hull, Pro-Chancellor of the University of Surrey, a Governor of the London School of Economics and a Trustee of The Economist. She has in depth knowledge of healthcare policy and regulation gained from 25 years in the British Parliament, including three years as Secretary of State for Health.

8. george mitchell, CBe Re/A/N/Ri

Joined the Board in May 2007. George is currently Chairman of The Malcolm Group and non-executive director of Intrinsic Financial Services. Previously he was an executive director of HBOS plc and the former Governor of the Bank of Scotland plc. George has worked in financial services for over 40 years and brings an in depth knowledge of capital management and banking, including financial discipline and control, to the Board. He chairs the Board of Bupa’s Regulated Entities in the UK.

9. rita Clifton Re/M

Joined the Board in July 2010. Formerly Chief Executive and then Chairman of Interbrand UK, Rita is currently on the board of DSG international, Nationwide Building Society and Chairman of Populus. Previously on the board of Judge Business School in Cambridge and EMAP plc, she served on the Sustainable Development Commission, is a Trustee of WWF-UK and a visiting Professor of Henley Business School. Rita is an expert in brand management, marketing, strategy and sustainability.

10. John lorimer A(Chair)/Ri

Joined the Board in July 2011. John is currently a non-executive director of International Personal Finance plc and Aberdeen New Dawn Investment Trust plc. Of his extensive commercial career of over three decades, 22 years were spent in financial services, including time with Standard Chartered and Citigroup. He has considerable experience working in Asia and Australasia. John brings expertise in governance and oversight, regulation, risk management and financial services.

COMPANY SECRETARY

11. nicholas BeazleyJoined Bupa in 1993, appointed Group Strategy Director in June 2000 and became Bupa’s Company Secretary in June 2005.


41

1

4 65

7 8 9

1110

2 3

go

ve

rn

an

Ce

re

po

rt

Committee KeYA Audit CommitteeRi Risk CommitteeN Nomination & Governance CommitteeM Medical Advisory Panel Re Remuneration Committee


42

governanCe leadership

Bupa’s governanCe FrameWorKBupa’s Board normally meets ten times a year and at other times as required. It devotes much of its time to overseeing Bupa’s strategy and policies, 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 and all other items are delegated to the CEO and the Bupa Executive Team. The levels of authority delegated to management are regularly reviewed and were updated during 2012. The roles of the Board, the Chairman and the CEO (including the division of responsibilities), the Senior Independent Director, and the Non-Executive Directors are clearly defined and set out in detail on bupa.com. The role of the Chairman and the CEO are clearly separated and defined.

Bupa’s governance structure is designed to enable the Board to lead the Company 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 both internal and external specialist advice. 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.

the role oF the BoardThe Board of Directors is responsible for the oversight of the management of Bupa. The Board is responsible for:

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

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

° oversight of Bupa’s operations;

° setting Bupa’s values and standards; and

° ensuring that the necessary financial and people resources are in place to meet Bupa’s objectives.

In addition, the Board has a responsibility to ensure that the highest standards of corporate governance are followed.

the role of the ChairmanLord Leitch 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 inside and outside the boardroom, including:

° constructive relations between Non-Executive and Executive Directors;

° setting agendas;

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

° ensuring clear and accurate information is provided to the Board in a timely manner;

° facilitation of contributions from Non-Executive Directors;

° effective Board Governance;

° succession planning and recruitment of Non-Executive Directors;

° management of the CEO; and

° oversight of major subsidiary Chairmen.

It is also the Chairman’s role to ensure effective communication with the Association Members and to chair General Meetings.

the role of the CeoStuart Fletcher is responsible for the day-to-day leadership and management of the business, in line with the strategy and long-term objectives approved by the Board. The CEO may make decisions in all matters affecting the operations, performance and strategy of the Group’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 role of the senior independent director (sid)The role of the SID includes the following key elements:

° acting as a sounding board for the Chairman and CEO on Board and Association Member matters;

° leading the Non-Executive Directors 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 Non-Executive Directors; and

° being available to Association Members.

the role of the non-executive directors (neds)The role of the NEDs has the following key elements:

° strategy and direction: constructively challenge and help develop proposals on longer term direction and strategy;

° performance: scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance;

° audit and risk: satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust and defensible; and

° people: determine appropriate levels of remuneration of Executive Directors, and have a prime role in appointing and, where necessary, removing them and in succession planning.


43

go

ve

rn

an

Ce

re

po

rt

A copy of the standard Non-Executive Director Terms of Appointment, which set out their expected time commitment, is available for inspection at Bupa’s registered office and during the AGM.

Board Composition, tenure and diversitY Bupa’s Board primarily consists of Independent Non-Executive Directors, outnumbering the Executive Directors with a ratio of four to one. The independence of the Non-Executive Directors from management and any other business or relationship which could materially interfere with their independence is considered and confirmed annually. All Directors are subject to annual re-election by the Association Members, which is subject to satisfactory performance. The Board introduced the requirements of annual re-election in 2012.

Lord Leitch, Bupa’s Non-Executive Chairman, who was independent on appointment, holds a number of other appointments, none of which are considered to impede his role at Bupa. Details of his other appointments are set out on page 40. The only significant change to his appointments during 2012 was his retirement as Deputy Chairman of Lloyds Banking Group.

An annual review of all Directors’ actual or potential conflicts of interest is undertaken. Any conflicts must be authorised and a Director would abstain from discussions on any matter where there may be a conflict. Many of Bupa’s Non-Executive Directors hold appointments at other organisations, as set out in their profiles on page 40. Each Non-Executive Director annually confirms that they are able to devote sufficient time to perform their role effectively.

The Board as a whole reviewed succession plans for Non-Executive Directors during 2012 and a phased replacement of Non-Executive Directors coming to the end of their second three year term was agreed. This approach gives continuity to the Board and a phased succession process as well as maintaining an appropriate balance of skills and experience on the Board and its committees. A policy on Board diversity was adopted by the Board in 2012, in which it sets outs that “Diversity 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.”

Following appointment, the Company Secretary facilitates a personalised induction programme for all new Directors which includes Bupa-specific knowledge building, site visits to Bupa’s businesses in both the UK and overseas, information and discussion on strategy and development plans for the business and meeting Association Members. Board and Committee members also receive specific training and development on topics which are of relevance during the year. This can take the form of presentations on specific market economics from leading academics and economists, to more detailed training on forthcoming changes to financial reporting and regulation. During 2012 this included sessions on both the Spanish and UK economic situations.

Board Composition

Executive2

Independent8

executive: CEO and CFO independent: Chairman, SID and NEDs

length oF tenure (Years)

1–3 4

4–6 5

7-9 1

Stuart Fletcher, Evelyn Bourke, John Lorimer, Rita Clifton

Lawrence Churchill, Prof Sir John Tooke, George Mitchell, Peter Cawdron, Baroness Bottomley

Lord Leitch

As at 31 December 2012

seCtor experienCe

4

2

4

Financial Services Clinical & Health System Governance Strategy & Development


44

eFFeCtiveness

Board perFormanCe and evaluationIn 2010, the Board underwent an externally facilitated Board Evaluation process which took the form of one-to-one interviews, culminating in a group discussion at the December Board meeting that year. The Evaluation concluded that Bupa’s Board was extremely effective and identified some areas for further development. These included:

° the development of appropriate succession plans;

° greater access to international business experience on the Board; and

° the use of technology in the dissemination of information.

Performance against each of these recommendations is regularly reviewed by the Board and its Committees throughout the year and action taken as necessary, such as improved succession planning and the appointment in 2011 of John Lorimer, who brings greater international experience to the Board from his time working in Asia Pacific, as well as in risk management. The implementation of the electronic distribution of Board papers has also improved the speed of dissemination and accessibility of Board materials.

The results of the Board’s most recent evaluation, which were reviewed by the Board as a whole in December 2012, have shown that the Board and its Committees continue to operate effectively with a small number of areas identified for further improvement. These centred on two key factors:

° greater information on the competitive environment in each of the key markets in which Bupa operates; and

° a growing international knowledge and experience on the Board.

These recommendations will be monitored throughout 2013 by the Nomination & Governance Committee and we will report progress against these recommendations in our 2013 Annual Report and Accounts.

The Board intends to conduct another externally facilitated review process in 2013 and the Nomination & Governance Committee has initiated the search for a suitable firm to conduct this work.

attendanCe at Board meetingsThe Board holds ten scheduled meetings each year and convenes others as necessary. In addition to the scheduled meetings, there is an annual strategy day, which in 2012 was held in June.

Set out below are some examples of the routine items discussed over and above standing items of minute review and approval, CEO Report, CFO Report and reports from the Committees. Also set out below is a table of attendance at Board meetings held during 2012.

attendanCeFebruary March April June July August September October November December

LORD LEITCH

RAY KINg1 – – – – – – – –

STUART FLETCHER2 – –

EVELYN BOURKE3 – – – – – – – –

BARONESS BOTTOMLEY

PETER CAwDRON

LAwRENCE CHURCHILL

RITA CLIFTON

JOHN LORIMER

gEORgE MITCHELL

PROF SIR JOHN TOOKE A

February: Bupa Well World Programme/Board Diversity Policy March: Approval of Annual Report and Accounts April: Brand Update June: Sanitas Update/Approval of Delegated Authorities July: Bupa International Update/NED fees August: Approval of interim results September: Business Development Update/GTIS Update October: Chief Medical Officer’s Annual Report November: Wellbeing, Health & Safety Update December: Approval of Annual Budget and Three Year Plan/Board Effectiveness Review1 Ray King stepped down from the Board on 14 March 20122 Stuart Fletcher joined the Board on 13 March 20123 Evelyn Bourke joined the Board on 12 October 2012A Apologies


45

go

ve

rn

an

Ce

re

po

rt

Who Bupa engages Withassociation membersBupa has around 100 Association Members who perform the governance role that would normally be undertaken by shareholders in a FTSE 100 PLC. They generally serve for a period of between five and ten years. The key difference for Bupa is that these Association Members have no equity interest and, consequently, no right to dividends.

The Association Members are eminent individuals in their own field, coming from a diverse range of sectors, including health and social care, business, regulators, academia, as well as the public sector and charities. Their expertise enables them to provide significant challenge to the Board on matters of performance and strategy as well as 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.

Bupa’s Association Members have opportunities to engage with the entire Board, including at the AGM held in May which is preceded by seminar updates from two of Bupa’s businesses.

The AGM is well attended by Association Members and is attended by all members of the Board. At the AGM, the Company proposes a separate resolution on each substantially separate issue, including a resolution on the Annual Report and Accounts. Voting at the AGM is conducted on a show of hands with the numbers of votes for, against or withheld on each resolution being made available on bupa.com as soon as practicable after the AGM. The questions raised by Association Members at the 2012 AGM covered areas such as financial performance, healthcare funding, exposure to worldwide economic conditions and the UK Competition Commission Inquiry into private provision.

Bupa also runs a series of autumn briefing sessions for the Association Members which gives another opportunity for engagement with representatives of the Board on matters of strategy and performance. These sessions are well attended and include rigorous challenge and questioning by the Association Members with a summary of the questions circulated to all Association Members, as well as to the Board, to ensure that Association Member views are well communicated and understood. These more formal sessions are combined with regular correspondence on key changes and developments within Bupa, such as on major acquisitions.

We run induction sessions for new Association Members. This is an opportunity for newly appointed Association Members to gain further understanding of Bupa and its strategy and their role in the governance of Bupa. Also in 2012, Stuart Fletcher met with a number of Association Members in small groups and on an individual basis as part of his induction to Bupa. This provided another opportunity for both the Association Members and the new CEO to engage on key issues such as strategy.

BondholdersBupa also has a number of debt securities in issue by subsidiary companies and, therefore, operates in accordance with the UK Listing Rules in respect of its announcements of 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, healthcare professionals, consumer groups, NGOs and other key stakeholders. This engagement enables us to contribute to health policy debate and build understanding of issues relevant to our customers and healthcare generally. We also partner with a number of bodies, largely NGOs, to campaign on specific health issues as part of our commitment to help more people access better healthcare.

engagement With assoCiation memBers

AgM seminar and AgM ° In 2012 the seminar was provided by Bupa Australia and presented the growth and development of that business including the re-branding from three brands to Bupa.

° 44% of Association Members attended the 2012 AGM (2011: 45%).

Autumn briefing sessions ° Three briefing sessions held in October to which 10-15 Association Members attended each session together with the Chairman, CEO, CFO and Company Secretary.

° Presentation on our Half Year results and learning about Bupa’s 2020 ambitions.

Induction – new for 2012 ° A briefing session was run in July to induct new Association Members on the role that they perform and how they can assist us to achieve our purpose.

engagement


46

° ensuring that the financial assessment of Bupa’s position and prospects presented by the Board is balanced and understandable;

° engaging the Institute of Internal Auditors to conduct a benchmark review of internal audit practices;

° reviewing the preliminary announcement, Annual Report and Accounts, interim announcement, including the going concern statement;

° considering 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;

° approving audit plans for the external and internal auditors;

° considering reports from the Chief Internal Auditor on the results of internal audit reviews, significant findings, management action plans, and timeliness of resolution;

° reviewing the Company’s internal financial controls;

° meeting privately with the external auditors;

° monitoring and reviewing the effectiveness of the internal audit activities and reviewing the independence and performance of the external auditors; and

° reporting to the Board on how it has discharged its responsibilities.

The Committee undertook a review of its effectiveness and found it continued to work effectively. The key area for continued improvement was the provision and format of information to enable the Committee to use its time most effectively. This has been addressed with the introduction of a new Committee paper template.

external auditorsIn relation to the external auditors, KPMG Audit Plc, the Committee assesses the scope, fee, objectivity and effectiveness annually. In line with professional standards, KPMG has a policy of rotating partners every five years. Mary Trussell has been the audit partner since 2010. The Committee will consider the appropriateness of placing the external audit out to tender in the coming years.

The Committee has a formal policy on Bupa’s relationship with KPMG, which includes financial approval limits for non-audit services and restrictions on the nature of work that can be

audit Committee reportThe Audit, Risk & Compliance Committee, chaired by George Mitchell, split its role in June 2012 when the Risk Committee was established. George, Lawrence Churchill and John Lorimer remain members of both the Audit and Risk Committees which brings continuity.

John lorimer Committee Chairman

From June, the remit of the audit Committee was revised to concentrate on monitoring the integrity of the group’s financial statements and the effectiveness of internal control systems and monitoring the effectiveness, performance and objectivity of the internal and external auditors. the current terms of reference are available on bupa.com.

All members of the Committee are Non-Executive Directors and this applied throughout the year both before and after the establishment of the Risk Committee. All members of the Committee have recent and relevant financial experience. The CEO, CFO, Chief Internal Auditor and Chief Risk Officer are routinely invited to attend meetings. The Committee also holds discussions with the external auditors without management present.

2012 aCtivitiesThe Committee met six times during the year (twice as the combined Audit, Risk & Compliance Committee and a further four times as the Audit Committee). In addition to ensuring the integrity of the annual and interim accounts the Committee was also active throughout the year in other key areas, including:


47

go

ve

rn

an

Ce

re

po

rt

performed to ensure that their objectivity and independence are not compromised. This policy is reviewed annually. 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.

Further, the Committee is also satisfied that KPMG continues to provide an effective audit service and has recommended to the Board that they be re-appointed. A resolution to re-appoint KPMG will be proposed at the AGM. 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 maintaining Bupa’s system of internal control and risk management 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.

The Board confirms that there is an ongoing process for identifying, evaluating and managing significant 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 the revised guidance on internal control published in October 2005 (the ‘Turnbull Guidance’). Risk Management processes are discussed in the Risk Committee Report on page 48.

The Committee carried out a review of the effectiveness of the system of internal control during the year which considered all significant aspects of internal control arising during the period. This included the work of internal audit and operation of material controls (financial, operational and regulatory compliance). During this review, the Committee did not identify, nor was it advised of, any failings or weaknesses which it determined to be significant.

Key features of our internal controls are:

° a framework of internal controls covering both financial and non-financial controls, the effectiveness of which is regularly reviewed by executive management and the Board; and

° the ‘three lines of defence’ model. The Risk Management function, under the leadership of the Chief Risk Officer, acts as the second line of defence. Internal Audit acts as a third line of defence. It provides independent and objective assurance to the Committee over the adequacy of systems of internal control, risk and governance established by management (the first line of defence) and monitored by the Risk Management function based in the Corporate Centre and Market Units.

Bupa’s Internal Audit team acts in accordance with the Global Institute of Internal Auditors’ professional standards and has unrestricted access 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 advisors.

The system of financial control includes:

° a comprehensive system for budgeting and planning together with monitoring and reporting the performance to the Board;

° appraising major investment projects;

° key controls over major business risks including reviews against performance indicators and exception reporting, and the preparation of monthly management accounts; and

° monthly reporting of treasury activities and risks, for review by senior executives.

Additional non-financial controls include:

° a Risk Management team, working with the business to assess risks and introduce systems to mitigate them. Details of major business incidents are reported to the Risk and Audit Committees and all notified accidents are investigated;

° a commitment by Bupa to ensure that its personnel meet high standards of integrity and competence as well as systems covering recruitment, training and development and the communication of policies and procedures throughout the organisation;

° Business Continuity Plans to enable the business to continue with minimum disruption to customers in the event of a disaster; and

° strict guidelines for the use of confidential customer data.

Internal Audit provides assurance over adequacy in the operation of financial controls. It reviews the effectiveness of those controls by undertaking an agreed schedule of internal audits each year and reporting its findings to executive management and the Committee. The schedule of internal audits forms part of an annually approved audit plan.

plans For 2013The Committee plans to focus on the risk and compliance culture, ethics, the adequacy of the second line of defence and future financial reporting changes.

attendanCeMarch1 April1 June August October December

JOHN LORIMER2 – –

PETER CAwDRON A A

LAwRENCE CHURCHILL

gEORgE MITCHELL3

March: Approval of Annual Report and Accounts April: Internal Audit Update/Risk Update/Compliance Update June: Internal Audit Update/Interim External Audit Plan/Half Year Reporting Update August: Approval of interim results/Audit fee proposal October: Internal Audit Update/Accounting and reporting issues for year end/External Quality Assurance Review December: Internal Audit Update/Accounting and reporting issues for year end/External Audit Status/Committee effectiveness survey/Internal Audit Plan for 20131 Meetings of the combined Audit, Risk & Compliance Committee2 John Lorimer was appointed Chairman of the Audit Committee in June 20123 George Mitchell was formerly Chairman of the combined Audit Risk & Compliance Committee until it split in June 2012A Apologies


48

lawrence Churchill Committee Chairman

risK Committee reportThe Risk Committee was established in June 2012 following the separation of the Audit, Risk & Compliance Committee.

appetite statements, the assessment of governance arrangements and specific thematic reviews on key areas of risk to the organisation. During the year the Committee reviewed the outputs on the Company’s risk management processes, reviewed the management of specific areas of risk including Strategic, Financial, Commercial (Insurance), Commercial (Non-Insurance), Operational and Clinical and reviewed specific incidents along with the corrective actions taken to address them.

The Committee undertook a review of its effectiveness as part of the overall Board Evaluation Process. The review noted that the Committee was satisfied with quality of the materials received, the level of debate and the focus of the Committee. However the Committee has asked for greater focus on emerging risks which will be actioned in 2013.

risK management proCessThe key features of the risk management process are as follows:

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

° the business conducts half yearly risk assessments based on identified business objectives which are reviewed and agreed by its executive management. Risks are categorised and evaluated in respect of their potential impact and likelihood. These risk assessments are reviewed and updated quarterly by the Committee and are reported to and reviewed by executive management; and

° the results of the business risk assessment form one of the bases for determining the internal audit plan. Internal Audit reports in relation to the areas reviewed are discussed with the Committee and agreed with the Audit Committee.

plans For 2013In 2013, the Committee plans to focus on the continued execution of risk management activities, development of risk appetite in the face of the deferment of Solvency II and opportunities for value creation through mergers and acquisitions.

The Committee will continue to receive regular reports on Bupa’s risk profile and will continue the programme of thematic risk reviews instigated in 2012.

the principal role of the Committee is to assist the Board in its leadership and oversight of risk, regulatory compliance and financial crime across the group.

This includes the understanding and, where appropriate, optimisation of current risk exposures and future risk strategy, determining overall risk appetite and tolerance, building the risk management framework including risk policies, process and controls, and the promotion of a risk awareness culture throughout the Group. A copy of the current Terms of Reference is available on bupa.com.

The Committee membership has remained unchanged since its formation in June 2012 and all members have been in attendance at all meetings. The members of the Committee are Non-Executive; the Chief Executive Officer, Chief Financial Officer and Chief Risk Officer are routinely invited to attend meetings.

2012 aCtivitiesIn the first six months of operation, the Committee focused on the continued development of the Risk Management Framework including refining Bupa’s risk

attendanCeJune October December

LAwRENCE CHURCHILL

JOHN LORIMER

gEORgE MITCHELL

June: Risk and governance framework/Quarterly risk report/Group Risk Appetite/Stress testing approach October: Quarterly risk report/Review of second line assurance structures/Review of: Financial risk, Insurance risk, Bribery Act Update December: Quarterly risk report/Group Risk Appetite/Clinical Governance/Group Insurance programme


49

go

ve

rn

an

Ce

re

po

rt

lord leitch Committee Chairman

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 governance 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 Association Member candidates. The Terms of Reference are on bupa.com.

The only change to the membership of the Committee during the year was Stuart Fletcher’s appointment as CEO in succession to Ray King. All other members of the Committee are Non-Executive. The Chief People Officer is invited to attend meetings relating to the recruitment of new Directors. From 1 January 2013, Rita Clifton also became a member of the Committee.

nomination & governanCe Committee reportThe Nomination & Governance Committee has two functions: overseeing appointments to the Board and Bupa’s governance arrangements.

2012 aCtivitiesDuring the year, the Committee undertook significant work on Board recruitment. Following Stuart Fletcher’s appointment, the Committee focused on recruiting a new CFO; Evelyn Bourke was appointed in October 2012. This process was led by the Committee with assistance from JCA Group who also provide other recruitment services to Bupa. The process involved establishing a role specification, followed by a formal, rigorous interview process of shortlisted candidates against set objective criteria. The appointment of Evelyn to the role followed an extensive search and review process and was based on her abilities, skills, knowledge and experience.

The Board as a whole reviewed the succession plans as each member of the Committee was the subject of the review and therefore conflicted. The Committee considered the role specification for the recruitment of new Non-Executive Directors to maintain the diversity of skills, knowledge and experience, particularly seeking further international experience. Ridgeway Partners LLP, who also provide other executive recruitment services to Bupa, was retained to provide a shortlist of candidates who met the role specification, which was discussed at their meeting in December.

The formalisation of the process for identification and selection of new Association Members has also been a key activity during 2012, with 14 new Association Members appointed during the year. This recruitment exercise has been a major part of the programme of Association Member refreshment.

The Committee undertook a review of its effectiveness and found it continued to be effective. The Committee will continue, on behalf of the Board, to monitor the actions arising from the overall Board Evaluation process and make recommendations to improve further as appropriate, including the recommendation of an external facilitator for the 2013 evaluation process.

plans For 2013In 2013, the Committee plans to focus on the effectiveness of governance arrangements with major subsidiary companies, the recruitment of two new Non-Executive Directors as successors to current Non-Executive Directors when they step down in line with the approved Board succession plans, and monitoring compliance with the 2012 UK Corporate Governance Code.

attendanCeFebruary April September December

LORD LEITCH

RAY KINg1 – – –

STUART FLETCHER2 –

BARONESS BOTTOMLEY

PETER CAwDRON

gEORgE MITCHELL

February: Corporate governance statement approval/Board committee composition/CFO recruitment April: NED reappointment/CFO recruitment September: NED role specification/2012 Board Evaluation/Association Member recruitment December: NED recruitment/Corporate Governance Code compliance/Committee Evaluation/Association Member recruitment1 Ray King stepped down from the Board/Committee on 14 March 20122 Stuart Fletcher joined the Board/Committee on 13 March 2012


50

as a provider and commissioner of healthcare, our clinical governance aims to improve the quality of clinical care across the organisation by consolidating, codifying and standardising organisational policies and approaches, particularly clinical and corporate accountability.

the role oF the mediCal advisorY panel (map)The principal role of the Panel is to advise the Board on issues relating to:

° professional standards, quality of care and clinical governance;

° Bupa’s medical policy;

° external oversight and assurance of Bupa’s clinical governance arrangements; and

° building positive and productive relationships with clinicians.

A copy of the current Terms of Reference is available on bupa.com.

map memBership The Panel comprises the Chief Executive Officer, three Non-Executive Directors and five independent members. The independent members, highly respected individuals from medical practice and

academia, provide valuable support and insight to the clinical governance standards and strategy at Bupa. The Panel is supported by the Chief Medical Officer.

Membership of the Panel changed considerably in 2012: Stuart Fletcher joined following his appointment as Chief Executive Officer; Dr Zollinger-Read joined in his new capacity as Bupa’s Chief Medical Officer; three of our independent members retired during the year; and Prof Aw concluded his term of membership in January 2013.

We would like to take this opportunity to thank the departing independent members – Tony Clayson, Prof McKee, Prof Pringle and Prof Aw – for their tremendous contribution to Bupa and for their support and guidance on our clinical governance agenda.

The appointment of successors to the independent members is underway. We are focusing on ensuring sufficient diversity of expertise and specialisms. We anticipate this process will be concluded in 2013.

2012 aCtivities The Panel oversaw various activities to underscore the safety mechanisms in place in both our own and partner facilities.

We rolled out a global Clinical Governance Toolkit, which includes a Clinical Governance Quality Assurance and an Audit Programme. The toolkit seeks to monitor and evaluate systematically the various elements of clinical governance within the business units.

During 2012, ten audits using the toolkit were conducted. The outcomes were reported and monitored with the business units, discussed at the Clinical Governance Steering Committee and subsequently at the Panel.

During the process of quality assurance, we have sought to strengthen our ability to respond to serious incidents in an open, timely and transparent way that promotes learning. One key quality initiative implemented during 2012 was the completion of the roll out of the World Health Organization Surgical Safety Checklist.

mediCal advisorY panel reportClinical governance is the main vehicle of accountability for standards of healthcare, for improving the quality of services, and for creating an environment in which clinical excellence can flourish. Excellence in clinical governance is a priority at Bupa.

prof sir John tooke Committee Chairman


51

go

ve

rn

an

Ce

re

po

rt

revieW oF the panelAs part of the Board Evaluation process, the Board reviewed the effectiveness of the Medical Advisory Panel and its operations in 2012.

As well as noting the considerable progress made by the Panel over many years in the quality of clinical governance and reporting, it made recommendations to improve further the standard and style of reporting of issues to highlight better those matters requiring the Panel’s attention and focus.

plans For 2013 We will be reviewing all our clinical governance processes with the aims of:

° consolidating and strengthening our current governance frameworks;

° strengthening our approach to clinical risk management;

° simplifying processes to improve the application of our governance framework; and

° supporting the Market Units in implementing market-specific governance practices and sharing lessons that could be applied from these innovations globally.

In addition, we will be:

° reviewing clinical governance in our Care Services businesses globally to develop the current framework to remain abreast of emerging best practice;

° adopting a “zero tolerance” approach to Never Events in Bupa Care Homes using an early warning system to limit human error;

° increasing audit activity for continued quality improvement;

° reviewing Bupa’s offering in the area of mental health, with a view to identifying new products and services to serve Bupa’s ambitions defined in Bupa 2020; and

° considering the development in technologies for the diagnosis and treatment of cancer, particularly in the area of genetics, to improve effectiveness and outcomes.

These will see Bupa move towards a global, integrated governance programme with all businesses developing Quality Improvement Plans based on outcomes.

To strengthen oversight further, the number of meetings in 2013 of the Panel will also increase from three to four.

attendanCeJanuary June October

PANEL MEMBERS:

PROF SIR JOHN TOOKE (CHAIRMAN)

RAY KINg1 A – –

STUART FLETCHER2 –

BARONESS BOTTOMLEY

RITA CLIFTON

ExECUTIVE MANAGEMENT:

DR ANDREw VALLANCE-OwEN3 – –

DR PAUL ZOLLINgER-READ4 – –

INDEPENDENT MEMBERS:

PROF TAR-CHINg Aw MBBS PHD FFOM, FRCP, FFPHM5

TONY CLAYSON MB, CHB, FRCS, FRCSORTH6 A A

PROF MARTIN MCKEE CBE, MSC, MD, FRCP, FRCPI, FFPHM7 – –

PROF MIKE PRINgLE CBE, MD, FRCgP, FRCP8 –

PROF MARY wATKINS PHD MN RN RMN

January: Care Services and Health Dialog Updates June: Bupa Australia Update/Consultant Recognition/Group Medical Director’s Annual Report 2011/Panel Member Refreshment criteria October: Sanitas Update/Care Services Quality of Care Governance Action Plan 1 Ray King stepped down from the Board on 14 March

20122 Stuart Fletcher joined the Board on 13 March 20123 Dr Vallance-Owen retired as Group Medical Director

in March 20124 Dr Zollinger-Read joined as Bupa’s Chief Medical

Officer in July 2012

5 Prof Aw stepped down in January 20136 Tony Clayson stepped down in November 20127 Prof McKee stepped down in April 20128 Prof Pringle stepped down in June 2012A Apologies


52

the Committee has responsibility for reviewing the design of the remuneration packages on an annual basis for the Chief executive officer, the Chief Financial officer and the managing directors of each market unit. it also agrees pay packages of new recruits within this group of senior executives.

Each year, the Committee assesses the appropriateness of the remuneration package in line with its aim to deliver a competitive level and mix of remuneration compared with companies

remuneration Committee reportThe principal role of the Committee is to set remuneration policy (including pension rights and compensation payments) in respect of the Company’s Executive Directors and senior executives.

of a similar scale and complexity to Bupa. The annual process typically includes a review of the basic salary, annual management bonus targets and awards, long-term incentive plan (LTIP) allocations and payments and also pension and other benefits. The Executive Directors are not involved in any discussions or decisions relating to their own performance or remuneration.

The Committee also has specific ownership of the rules of the LTIP including the responsibility to set appropriate targets and determine the payout levels. Payouts are based on assessment of the achievements against objectives and performance over a three year period. The Committee also has oversight of the performance management framework and the annual management bonus for the management population.

The Committee membership remained unchanged during the year and consists of four independent Non-Executive Directors. All Committee members were in attendance at all meetings during 2012. Those invited to attend include the CEO, Company Secretary, Chief People Officer and a representative from the Committee’s independent advisors where appropriate. The Committee also met without the executives present.

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

2012 aCtivitiesThere were two important areas of activity in 2012. The Committee reviewed the independent remuneration advisors and decided to change to a new firm, Deloitte LLP. The Committee then commissioned the new advisors to carry out a “Health Check” on the current remuneration arrangements and

peter Cawdron Committee Chairman attendanCe

February September December

PETER CAwDRON (CHAIRMAN)

LORD LEITCH

RITA CLIFTON

gEORgE MITCHELL

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


53

go

ve

rn

an

Ce

re

po

rt

the remuneration reportAlthough not yet mandatory, in the Remuneration report on the following pages, we have aimed to apply the majority of the new requirements anticipated under the UK government’s Directors’ Remuneration Reporting regulations. Our intention is that the redesigned Remuneration report provides more transparency and clarity, and is easier to understand.

The Board is committed to achieving best practice in the determination and implementation of Bupa’s remuneration policy. In aligning with the Directors’ Remuneration Reporting regulations, this report describes the remuneration and benefit policies of Bupa as they relate to the Directors of the Company. It is divided into two distinct sections – the first on remuneration policy and the second on the implementation of the policy.

packages for the senior executives within Bupa to determine whether they were appropriate and effective and whether they were aligned to the strategic goals set by the Board and in line with market practice. The Check found that the design of the current remuneration structures was largely appropriate and recommended a review of the target setting methodology for the LTIP.

The Committee undertook a review of its effectiveness as part of the overall Board Evaluation Process and found that the Committee was working effectively. However it was felt there was room for improvement in one area relating to the quality of information provided to the Committee to enable effective decision making. The quality of information improved in the latter half of 2012 and this will continue to be an area for monitoring and further improvement during 2013.

plans For 2013In 2013, the Committee plans to focus on aligning the targets for the annual management bonus and the LTIP performance objectives with Bupa’s long-term goals.

“The Board is committed to achieving best practice in the determination and implementation of Bupa’s remuneration policy.”


54

remuneration report

poliCY reportThe aim of Bupa’s remuneration policy is to provide total remuneration at a level sufficient to attract and retain key executives and to motivate them to deliver strong and sustainable business performance. The policy is intended to deliver a competitive level and mix of remuneration compared with companies of a similar scale and complexity to Bupa.

serviCe ContraCtsExecutive Directors have a twelve month rolling employment contract. The notice requirements are twelve 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 Non-Executive Director role and to accept and retain the fee for this Non-Executive Director appointment. This is on the basis that any external appointment does not give rise to a conflict of interest.

PAY AT VARIOUS PERFORMANCE LEVELS (£M)

Other benefits Pension LTIP Annual bonus Salary

Chief Executive Officer Chief Financial Officer

paY at various perFormanCe levelsBupa aims to provide a balance of fixed and variable compensation that provides stability while incentivising superior performance. At target, we aim for at least 50% of Executive Directors’ remuneration to be based on individual and business performance.

The graphs below illustrate the possible variation in remuneration for different levels of performance.

relative importanCe oF the spend on paYWe aim to award salary increases for the Executive Directors in line with company performance and pay increases for the general UK staff population.

As both the CEO and the CFO joined Bupa during 2012, it is not possible to provide a long-term analysis of salary increases. However, it should be noted that the growth in underlying profit in 2012 was 8%, and the increase in total staff costs in 2012 was 6%.

Sig

nifi

can

tly

bel

ow

tar

get

700

,00

0/0

/0/2

10,0

00

/57,

03

6

On

targ

et70

0,0

00

/70

0,0

00

/1,0

50

,00

0/2

10,0

00

/57,

03

6

Max

imu

m70

0,0

00

/1,0

50

,00

0/1

36

5,0

00

/210

,00

0/5

7,0

36

£2

,717

,03

6 £3

,38

2,0

36

Sig

nifi

can

tly

bel

ow

tar

get

475

,00

0/0

/0/1

42

,50

0/1

8,1

63

On

targ

et4

75,0

00

/35

6,2

50

/475

,00

0/1

42

,50

0/1

8,1

63

Max

imu

m4

75,0

00

/53

4,3

75/6

17,5

00

/14

2,5

00

/18

,16

3

£1,

46

6,9

13

£1,

787,

53

8

£9

67,

03

6

£6

35,6

63

Sig

nifi

can

tly

bel

ow

tar

get

700

,00

0/0

/0/2

10,0

00

/57,

03

6

On

targ

et70

0,0

00

/70

0,0

00

/1,0

50

,00

0/2

10,0

00

/57,

03

6

Max

imu

m70

0,0

00

/1,0

50

,00

0/1

36

5,0

00

/210

,00

0/5

7,0

36

£2

,717

,03

6 £3

,38

2,0

36

Sig

nifi

can

tly

bel

ow

tar

get

475

,00

0/0

/0/1

42

,50

0/1

8,1

63

On

targ

et4

75,0

00

/35

6,2

50

/475

,00

0/1

42

,50

0/1

8,1

63

Max

imu

m4

75,0

00

/53

4,3

75/6

17,5

00

/14

2,5

00

/18

,16

3

£1,

46

6,9

13

£1,

787,

53

8

£9

67,

03

6

£6

35,6

63


55

Bu

sin

ess r

ev

ieW

go

ve

rn

an

Ce

re

po

rt

paY poliCY taBle – exeCutive direCtors

Key elements of remuneration

Base salary annual Bonus long term incentive plan pension Benefits

purpose and link to strategy

To attract and retain, reflecting role and contribution.

To incentivise the achievement of annual objectives and drive superior business performance.

To attract and retain executives and incentivise sustainable long- term growth and value creation.

To provide health security and family protection benefits.

To attract and retain executives by providing health and wellbeing benefits and providing security for families.

operation Reviewed annually with any changes implemented in April. Decision influenced by:

° level of accountability, experience and individual performance;

° benchmark median data from comparable pay peer groups;

° overall business performance and average salary increases for the rest of Bupa.

Targets and individual objectives are set annually.

Bonus awards are determined by the Committee after the financial year end, based on performance against agreed targets and objectives.

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

A new three year rolling LTIP performance period starts each year, and financial targets are determined by the Committee at the start of each plan. Executives receive an initial allocation at the start of the three year plan period which should pay out at the end of the plan period to the extent that the financial targets are achieved.

The plan can pay out up to a maximum of 130% of the initial allocation.

The Company operates a defined contribution pension scheme, called The Bupa Retirement Savings Plan. Executives may have the option to take this as a cash allowance instead of pension.

The Company has closed its defined benefit scheme to new members. The former CEO was a member until his retirement in June 2012.

Executives are entitled to private health cover, annual health assessment, 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.

opportunity Fixed amount shown in the table of single total figure of remuneration.

CEO Target: 100% of salary Maximum: 150% of salary

CFO Target: 75% of salaryMaximum: 112.5% of salary

CEOTarget allocation: 150% of salaryMaximum payout: 195% of salary

CFOTarget allocation: 100% of salaryMaximum payout: 130% of salary

The CEO and CFO receive employer contributions of 30% of base salary into a pension scheme or as a cash allowance.

The former CEO participated in a 1/30th accrual, defined benefit final salary scheme.

The value of these benefits is disclosed in the single total figure table.

performance metrics

None Annual bonus payments are based on achievement of challenging financial and non-financial objectives. 70% of the bonus opportunity is linked to achievement of Bupa’s annual operating plan; and 30% is linked to key strategic drivers.

Payouts are determined by the Remuneration Committee based on achievements against two performance measures. 75% of the LTIP allocation is linked to a Growth in Reserves target and 25% is linked to a Risk Adjusted Profit target.

100% of the target allocation becomes payable if the predetermined target is achieved. In the event of over-achievement, up to 130% of the allocation may be earned. A threshold performance target is in place at which 30% of the allocation is earned. No payments are made if performance is below the threshold target.

None None

Changes in year

None No change has been made to measures or weighting.

However, a review is in progress and changes will be made for 2013.

Risk Adjusted Profit was introduced as a new performance metric in 2012.

In order to further incentivise outperformance, the maximum award was increased from 120% to 130% of the allocation.

None None


56

remuneration report Continued

implementation reportThe Report indicates how the policy has been implemented in the reporting year. As well as showing remuneration figures for the Executive Directors and Non-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.

The following sections of this report contain further details of each Director’s remuneration, which have been audited.

detail oF perFormanCe against metriCs For variaBle aWardsGiven the change in the reporting methodology, details of the two LTIPs impacting 2012 have been included for completeness.

The performance of the 2009-2011 LTIP, which was based on performance in the three year period to 31 December 2011, was assessed and payments were made on 1 April 2012. The reserves grew by 28% over the performance period to a total of £4,591.9m compared to the predetermined target of £4,445.6m, leading to a possible payout at 120% of allocation. The Remuneration Committee, in reviewing the overall business performance of Bupa, used its discretion to cap the payout at 100% to recognise the impact of some significant write-downs in 2010 and 2011.

The performance of the 2010-2012 LTIP, which was based on performance in the three year period to 31 December 2012, was assessed and payments will be made in April 2013. The reserves grew by 30% over the three year performance

period to a total of £5,127.7m compared to the predetermined target of £4,961.8m leading to a possible payout at 120% of allocation. The Remuneration Committee, in reviewing the overall business performance of Bupa, used its discretion to cap the payout at 100% to recognise the impact of some significant write-downs in 2010 and 2011.

In respect of the management bonus, Bupa achieved the annual profit targets set for these purposes and bonuses for the Executive Directors on both the financial and non-financial measures were fully funded. The actual bonus awards were determined by the Committee based on each Director’s individual objectives and contribution, and these are reported in the single total figure table.

paY poliCY taBle – non-exeCutive direCtors

purpose and link to strategy

operation opportunity performance metrics Changes in year

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

Reviewed annually with any changes implemented in July. Decision influenced by:

°overall business performance;

°market median fees for comparable roles and average salary increases for the rest of Bupa;

°number of committees served on; and

°position on committee (member or Chair).

The Chairman receives an all inclusive fee.

NEDs receive a fixed basic fee. Additional fees are paid for chairing and/or membership of Board Committees and for the Senior Independent Director.

None For NEDs, excluding the Chairman, a reduction in basic fee offset by additional fees paid for service on each of the Board Committees and for complexity and time commitment of role.

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


57

Bu

sin

ess r

ev

ieW

go

ve

rn

an

Ce

re

po

rt

single total Figure taBle (£’000)

notes

salary/ fees 2012

Benefits 2012

pension 2012

annualbonus*

2012ltip*2012

total 2012

total 2011

executive directors

stuart Fletcher A 583 48 175 875 0 1,681 –

evelyn Bourke B 129 5 36 98 0 268 –

712 53 211 973 0 1,949 0

non-executive directors C

lord leitch (Chairman) 317 55 – – – 372 352

Baroness Bottomley D 57 0 – – – 57 57

peter Cawdron E 85 1 – – – 86 80

lawrence Churchill F 103 2 – – – 105 93

John lorimer G 85 1 – – – 86 29

george mitchell H 153 1 – – – 154 152

prof sir John tooke I 77 1 – – – 78 75

rita Clifton J 59 0 – – – 59 56

936 61 0 0 0 997 894

Former director

ray King K 406 23 262 363 743 1,797 3,099**

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

* As defined by the UK government, Annual bonus 2012 refers to bonus payments earned in 2012, and LTIP 2012 refers to payouts from the plan which ended in 2012 (2010-12 Plan)

** 2011 numbers are restated for comparability with the new approach for 2012

Notes

A. Stuart Fletcher was appointed as Chief Executive Officer on 1 March 2012 and figures in the table are for a part-year.

B. Evelyn Bourke was appointed as Chief Financial Officer on 24 September 2012, and figures in the table are for a part-year.

C. During the year the Board reviewed the basis on which fees are calculated for each Non-Executive Director, and it agreed to divide the fee into a base fee (£52,000) with additional fee(s) for participation as a Member or Chairman of each Board Committee. Previous year fees for Committee membership are not therefore applicable.

D. The fees receivable by Baroness Bottomley include £1,250 for membership of the Nomination & Governance Committee and £2,000 for membership of the Medical Advisory Panel.

E. The fees receivable by Peter Cawdron include £15,375 (2011: £13,500) as Chairman of the Remuneration Committee, £11,000 (2011: £9,000) for his role as Senior Independent Director, £3,000 for membership of the Audit Committee and £1,250 for membership of the Nomination & Governance Committee.

F. The fees receivable by Lawrence Churchill include £36,500 (2011: £36,000) as a Non-Executive Director of Bupa Insurance Limited, £10,000 for Chairman of the Risk Committee (from July 2012) and £3,000 for membership of the Audit Committee.

G. The fees receivable by John Lorimer include £18,500 as a Non-Executive Director of Bupa Insurance Limited (from June 2012), £10,000 for Chairman of the Audit Committee (from July 2012) and £3,000 for membership of the Risk Committee.

H. The fees receivable by George Mitchell include £80,000 (2011: £75,000) as Chairman of Bupa Insurance Limited, £10,000 as Chairman of the Audit, Risk & Compliance Committee, £3,000 for membership of the Audit Committee, £3,000 for membership of the Risk Committee, £2,000 for membership of the Remuneration Committee and £1,250 for membership of the Nomination & Governance Committee.

I. The fees receivable by Prof Sir John Tooke include £12,875 (2011: £10,000) as Chairman of the Medical Advisory Panel and £10,000 (2011: £8,333) as a member of the Cromwell Hospital Steering Committee.

J. The fees receivable by Rita Clifton include £2,000 for membership of the Remuneration Committee, £2,000 for membership of the Medical Advisory Panel and £1,250 for membership of the Executive Sustainability Committee.

K. Ray King retired from the Company on 30 June 2012.

single total Figure oF remuneration For eaCh direCtorIn line with the UK government recommendations, a table showing a single total figure for remuneration for each Director is provided below.


58

detail on variaBle paY that has Been aWarded in the reporting YearLTIP allocations for 2012-2014 were made to Executive Directors on their joining during 2012. The plan covers the three year performance period to 31 December 2014 with a potential payout in April 2015. The table below shows more detail of the allocations made in the year.

speCial one-oFF itemsThe CFO, Evelyn Bourke, joined Bupa on 24 September 2012. To compensate her for the loss of certain deferred awards from her previous employer, Evelyn Bourke was awarded additional one-off awards. These include a one-off LTIP allocation of £120,000 under the 2012-2014 plan (shown in the Detail on Variable Pay table); a one-off additional allocation of £85,000 under the 2013-2015 LTIP plan and an additional annual bonus opportunity of up to £202,500 (42.6% of salary) in the 2013 annual bonus scheme.

Ray King, the former CEO, retired from Bupa in June 2012. His unvested LTIP allocations were pro-rated to his leave date (details disclosed in Bupa Annual Report 2011) and he received a pro-rated management bonus for 2012 which is included in the single total figure table.

provision oF adviCeThe Committee takes advice on remuneration issues from independent advisors who also provide market data on levels of executive remuneration and benefits.

In February 2012, the Remuneration Committee changed their advisors from Mercer Ltd to Deloitte LLP, a voluntary member of the Remuneration Consultants’ Group. During the year, Deloitte also provided other consultancy services to Bupa. The total cost of advice on remuneration in 2012 for the Committee was £109,952. This included a one-off remuneration Health Check which cost £39,000.

long-term inCentive plan

scheme type 2012–2014 long-term incentive plan Ceo CFo

Basis of award 150% of base salary 100% of base salary pro-rated from

date of joining plus one-off special award

as part of joining arrangements

Face value of award £1,050,000 £238,750

amount that would vest at maximum performance (130%)

£1,365,000 £310,375

amount that would vest at threshold performance (30%)

£315,000 £71,625

date performance period ends 31 December 2014 31 December 2014

remuneration report Continued


59

go

ve

rn

an

Ce

re

po

rt

prinCipal risKs and unCertaintiesThe Group’s principal risks and uncertainties are set out on pages 34 to 37 together with a description of how Bupa manages these.

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 ten Board meetings each year and other meetings are convened as needed.

Biographical details of the Non-Executive Chairman, two Executive Directors and seven Non-Executive Directors who currently hold office, are set out on page 40.

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 the going concern basis in preparing the financial statements.

poliCY For paYing CreditorsIt is Bupa’s policy to pay its providers and other creditors in accordance with agreed terms and conditions. As a holding company, the Company itself has no trade creditors.

the strategic report on pages 1 to 37, and the governance report on pages 38 to 58, including the remuneration report on pages 54 to 58, all form part of this report. the audited Financial statements are presented from page 61.

prinCipal aCtivitiesThe principal activities of the Group are the provision of health insurance and health and care facilities and services. The latter includes ownership and management of care homes, hospitals and clinics, health screening, provision of disease management services and occupational and community health services.

FinanCial resultsThe results of the Group for 2012 are reported on pages 63 to 110. The profit for the financial year of £448.7m (2011: profit £135.9m) has been transferred to equity.

aCquisitions and disposalsDetails of the acquisitions made during the year are shown in note 4.0. There were no disposals made during the year.

CharitaBle and politiCal ContriButionsDuring 2012, Bupa made charitable donations totalling £4.1m (2011: £7.3m). This included payments to The Bupa Foundation of £3.0m (2011: £2.6m), to the Bupa Health Foundation in Australia of £nil (2011: £3.4m), to the Sanitas Foundation of £0.8m (2011: £0.8m), and to UK registered charities of £0.2m (2011: £0.5m). An additional £0.1m (2011: £nil) was donated to non-registered charities. No political donations were made.

emploYment poliCies Details of Bupa’s employment policies, including policies on equal opportunities for disabled employees, are included in Our People on pages 32 and 33.

disClosure oF inFormation to auditors The 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 that 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.

auditorsIn accordance with Section 485 of the Companies Act, 2006 KPMG Audit Plc offers itself for re-appointment at the Annual General Meeting as auditors of the Company.

By order of the Board

stuart Fletcher Chief Executive Officer

11 March 2013

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


60

the Companies Act 2006. They have 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 have decided to prepare voluntarily a directors’ remuneration report in accordance with Schedule 8 to the Companies Act 2006 The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, 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 were required to comply with the Listing Rules and the Disclosure Rules and Transparency Rules of the Financial Services 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.

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 enable them to ensure that its financial statements comply with

statement oF direCtors’ responsiBilities

61

FINA

NC

IAL STA

TEM

EN

TS

FINANCIAL STATEMENTSThe presentation of the financial statements has been refreshed in 2012 to reduce complexity and to provide greater clarity to readers.

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’, ‘Business combinations and disposals’, ‘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 Auditors’ report 62

Primary statements 63

Section 1 – Basis of preparation 68

Section 2 – Results for the year

Operating segments 69

Revenues 71

Insurance claims 72

Other operating expenses 73

Other income and charges 74

Financial income and expenses 74

Taxation expense 75

Section 3 – Operating assets and liabilities

Working capital 76

Intangible assets 78

Property, plant and equipment 81

Investment properties 84

Provisions under insurance 85 contracts issued

Provisions for liabilities 87 and charges

Post employment benefits 88

Deferred taxation assets and liabilities 92

Section 4 – Business combinations and disposals

Acquisitions 93

Disposals 94

Equity accounted investments 95

Section 5 – Risk management and Capital management

Financial investments 96

Borrowings 98

Derivatives 100

Capital management 100

Risk management 101

Section 6 – Other notes

Related party transactions 110

Commitments and contingencies 110

Section 7 – Company primary statements and associated notes 111

Section 8 – Five year financial summary 123

International Financial Reporting 124 Standards relevant to Bupa

Bupa annual report 2012

62 Bupa annual report 2012 InDEPEnDEnT AuDITORS’ REPORT

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

We have audited the financial statements of The British united Provident Association Limited for the year ended 31 December 2012 set out on pages 63 to 122. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the Eu and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

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 (in addition to that required to be prepared) 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.

This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and, in respect of the separate opinion in relation to the Directors’ Remuneration report and the reporting on corporate governance, on terms that have been agreed. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditors’ report and, in respect of the separate opinion in relation to the Directors’ Remuneration report and reporting on corporate governance, those matters that we have agreed to state to them in our report, and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed.

respective responsiBilities of Directors anD auDitorAs explained more fully in the Statement of Directors’ Responsibilities set out on page 60, the Directors are responsible for the preparation of the group financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (uK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.

scope of the auDit of the financial statementsA 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.

opinion on financial statementsIn 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 2012 and of its profit for the year then ended;

° the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the Eu;

° the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the Eu and as applied in accordance with the provisions of the Companies Act 2006; and

° the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.

opinion on other matters prescriBeD By the companies act 2006 anD unDer the terms of our engagementIn 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 Companies Act 2006 The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, as if those requirements were to apply to the Company; and

° the information given in the Report of the Board of Directors for the financial year for which the financial statements are prepared is consistent with the financial statements.

matters on which we are requireD to report By exceptionWe have nothing to report in respect of the following:

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 Report as if the Company were required to comply with the Listing Rules and the Disclosure Rules and Transparency Rules of the Financial Services Authority in relation to those matters. under the terms of our engagement we are required to review:

° the Directors’ statement, set out on page 59, in relation to going concern; and

° the part of the Corporate Governance Report on pages 38 to 53 relating to the Company’s compliance with the nine provisions of the uK Corporate Governance Code specified for our review.

Mary Trussell(Senior Statutory Auditor) for and on behalf of KPMG Audit Plc, Statutory AuditorChartered Accountants15 Canada SquareLondon E14 5GL11 March 2013

63

FINA

NC

IAL STA

TEM

EN

TS

Bupa annual report 2012 PRIMARy STATEMEnTS

CONSOLIDATED INCOME STATEMENTfor the year ended 31 December 2012

Section2012

£m2011 £m

RevenuesGross insurance premiums 2.1 6,692.8 6,379.9Premiums ceded to reinsurers 2.1 (29.2) (34.4)net insurance premiums earned 6,663.6 6,345.5

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

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

Profit before financial income and expenses 528.8 199.5

Financial income and expensesFinancial income 2.5 124.6 95.0Financial expenses 2.5 (69.8) (74.5)

54.8 20.5

Profit before taxation expense 583.6 220.0

Taxation expense 2.6 (134.9) (84.1)

Profit for the financial year 448.7 135.9

Attributable to:Bupa 438.2 131.1non-controlling interests 10.5 4.8Profit for the financial year 448.7 135.9

Sections 2 to 6 form part of these financial statements.

64

Section2012

£m2011 £m

Profit for the financial year 448.7 135.9

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

Total comprehensive income for the year 381.1 48.1

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

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOMEfor the year ended 31 December 2012



65

FINA

NC

IAL STA

TEM

EN

TS

Section2012

£m2011£m

Non-current assetsIntangible assets 3.1 2,146.1 2,208.8Property, plant and equipment 3.2 2,323.4 2,272.5Investment property 3.3 159.9 132.5Equity accounted investments 4.1 34.2 43.3Financial investments 5.0 1,086.1 661.5Derivative assets1 5.2 84.0 76.7Assets arising from insurance business 3.0.2 0.6 4.9Deferred taxation asset 3.7 2.6 –Other receivables1 3.0.1 121.9 55.7Restricted assets1 3.0.4 44.0 39.4Post employment benefit net assets 3.6 104.9 68.1

6,107.7 5,563.4Current assetsFinancial investments 5.0 1,165.4 1,221.6Derivative assets1 5.2 1.6 5.0Inventories 3.0.5 19.9 16.5Assets arising from insurance business 3.0.2 870.4 828.8Trade and other receivables1 3.0.1 404.7 303.8Restricted assets1 3.0.4 8.7 5.9Cash and cash equivalents1 3.0.3 1,255.7 1,183.1

3,726.4 3,564.7Total assets 9,834.1 9,128.1

Non-current liabilitiesSubordinated liabilities 5.1 (451.2) (428.9)Other interest bearing liabilities 5.1 (667.3) (669.4)Derivative liabilities1 5.2 (4.5) (5.0)Provisions under insurance contracts issued 3.4.1 (24.8) (25.7)Post employment benefit net liabilities 3.6 (62.5) (65.1)Provisions for liabilities and charges 3.5 (26.3) (26.6)Deferred taxation liabilities 3.7 (158.3) (174.7)Other payables1 3.0.6 (19.9) (12.3)

(1,414.8) (1,407.7)Current liabilitiesSubordinated liabilities 5.1 (6.0) (5.9)Other interest bearing liabilities 5.1 (21.4) (24.3)Derivative liabilities1 5.2 (3.7) (3.8)Provisions under insurance contracts issued 3.4 (2,355.2) (2,136.5)Other liabilities under insurance contracts issued 3.4.2 (16.8) (13.7)Provisions for liabilities and charges 3.5 (58.5) (55.9)Current taxation liabilities (157.4) (135.8)Trade and other payables1 3.0.6 (982.4) (900.6)

(3,601.4) (3,276.5)Total liabilities (5,016.2) (4,684.2)Net assets 4,817.9 4,443.9EquityProperty revaluation reserve 631.9 642.7Income and expenditure reserve 3,544.9 3,075.9Cash flow hedge reserve 25.1 29.0Foreign exchange translation reserve 590.1 662.7Equity attributable to Bupa 4,792.0 4,410.3Equity attributable to non-controlling interests 25.9 33.6Total equity 4,817.9 4,443.9

1 These balance sheet items have been re-presented, further details are provided in Section 1.7

Lord Leitch Evelyn BourkeChairman Chief Financial Officer

CONSOLIDATED BALANCE SHEETas at 31 December 2012

Approved by the Board of Directors and signed on its behalf on 11 March 2013 by


66 Bupa annual report 2012 PRIMARy STATEMEnTS

Section2012

£m2011 £m

Operating activitiesProfit before taxation expense 583.6 220.0

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

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

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

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

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

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

Cash and cash equivalents at end of year 3.0.3 1,253.4 1,183.0

CONSOLIDATED STATEMENT OF CASH FLOWSfor the year ended 31 December 2012


67

FINA

NC

IAL STA

TEM

EN

TS


Section

Property revaluation

reserve £m

Income and expenditure

reserve £m

Cash flow

hedge reserve

£m

Foreign exchange

translation reserve

£m

Total attributable

to Bupa £m

non-controlling

interests £m

Total equity

£m

2012At beginning of year 642.7 3,075.9 29.0 662.7 4,410.3 33.6 4,443.9Retained profit for the financial year – 438.2 – – 438.2 10.5 448.7

Other comprehensive (expense) / incomeunrealised loss on revaluation of property 3.2 (17.0) – – – (17.0) – (17.0)Realised revaluation surplus on disposal of property (1.3) 1.3 – – – – –Actuarial gain on pension schemes 3.6 – 18.5 – – 18.5 – 18.5Foreign exchange translation differences on goodwill 3.1 – – – (40.7) (40.7) – (40.7)Other foreign exchange translation differences (1.6) – – (37.0) (38.6) (0.8) (39.4)net gain on hedge of net investment in overseas

subsidiary companies 5.4.2 – – – 5.3 5.3 – 5.3Loss on cash flow hedge on LuX MED acquisition 5.4.2 – – (2.2) – (2.2) – (2.2)Change in fair value of underlying derivative of

cash flow hedge – – (0.5) – (0.5) (0.3) (0.8)Acquisition of subsidiary companies attributable to

non-controlling interest 4.0 – – – – – 5.8 5.8Acquisition of non-controlling interest

in subsidiary company 4.0 – 12.0 (1.4) – 10.6 (15.9) (5.3)Taxation expense and credit on income and expenses

recognised directly in other comprehensive income 2.6 9.1 (1.0) 0.2 (0.2) 8.1 0.1 8.2Other comprehensive (expense) / income for the year,

net of taxation (10.8) 30.8 (3.9) (72.6) (56.5) (11.1) (67.6)

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

Contributions to non-controlling interestsDividends paid to non-controlling interests – – – – – (7.1) (7.1)

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

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

Other comprehensive (expense) / incomeunrealised loss on revaluation of property 3.2 (31.1) – – – (31.1) – (31.1)Actuarial loss on pension schemes 3.6 – (93.0) – – (93.0) – (93.0)Foreign exchange translation differences on goodwill 3.1 – – – 3.4 3.4 – 3.4Other foreign exchange translation differences (0.4) – – (5.1) (5.5) (0.3) (5.8)net gain on hedge of net investment in overseas

subsidiary companies – – – 7.8 7.8 – 7.8Realisation of cash flow hedge on impairment of intangibles

arising on acquisition – – (1.3) – (1.3) – (1.3)Change in fair value of underlying derivative of

cash flow hedge – – (0.6) – (0.6) (0.4) (1.0)Taxation expense and credit on income and expenses

recognised directly in other comprehensive income 2.6 13.7 18.7 0.2 0.5 33.1 0.1 33.2Other comprehensive (expense) / income for the year,

net of taxation (17.8) (74.3) (1.7) 6.6 (87.2) (0.6) (87.8)

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

Contributions to non-controlling interestsDividends paid to non-controlling interests – – – – – (0.3) (0.3)Total contributions to non-controlling interests for the year – – – – – (0.3) (0.3)

At end of year 642.7 3,075.9 29.0 662.7 4,410.3 33.6 4,443.9

CONSOLIDATED STATEMENT OF CHANGES IN EQUITYfor the year ended 31 December 2012


68

NOTES TO THE FINANCIAL STATEMENTSfor the year ended 31 December 2012

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 (IFRSs) as adopted by the Eu. The appropriate provisions of the Companies Act 2006 applicable to companies reporting under IFRSs have also been complied with.

A summary of IFRSs that are relevant for the Group are included on page 124.

The financial statements were approved by the Board of Directors on 11 March 2013. 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, available for sale financial investments and derivative instruments.

1.2 Basis of consoliDationThe consolidated financial statements for the year ended 31 December 2012 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.

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:

° Insurance accounting (Section 3.4)

° Deferred revenue (Section 3.0.6)

° Financial instruments (Section 5.0)

° Pension assumptions (Section 3.6.2)

° Intangible assets and goodwill impairment (Section 3.1)

° Property valuations (Section 3.2)

° Taxation (Section 2.6)

1.4 going concernManagement has conducted a detailed assessment on 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 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 2 to 37. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Financial Review on pages 18 to 21.

The Group’s £800m committed bank facility, which was renegotiated in October 2012 and matures on October 2017, was undrawn at 31 December 2012 with the exception of £6.4m of outstanding letters of credit for general business purposes.

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 2012 have been reviewed and it has been concluded that they have no material impact on the financial statements of the Group.

1.6 forthcoming financial reporting requirementsThe following financial reporting standards have been issued but are not effective for the year ended 31 December 2012, and have not been early adopted by the Group. The Group has reviewed the effect of all other amendments to IFRSs and interpretations effective for accounting periods beginning on or after 1 January 2013 and does not expect them to have a significant impact on the financial statements.

Bupa annual report 2012 nOTES TO ThE FInAnCIAL STATEMEnTS

FINA

NC

IAL STA

TEM

EN

TS

69Bupa annual report 2012 nOTES TO ThE FInAnCIAL STATEMEnTS

a) IAS 19 Employee Benefits (Amendment)The amendment does not change the total return on defined benefit plan assets, but it does change the split between what is recognised in the income statement and what is recognised in other comprehensive income by changing the way the interest expense is calculated in the income statement. A number of new disclosures are also required. The amendment becomes effective for annual periods beginning on or after 1 January 2013. If the amendment had been adopted for the year ended 31 December 2012 the profit before taxation would be increased by £1.5m.

b) IFRS 10 Consolidated financial statementsIFRS 10 will supersede IAS 27 ‘Consolidated and separate financial statements’ and SIC 12 ‘Consolidation – Special Purpose Entities’. The standard requires investments that are under control of the Group to be consolidated within the Group financial statements. IFRS 10 sets out the principles for establishing whether control exists.

The amendment becomes effective for annual periods beginning on or after 1 January 2014. If the amendment had been adopted for the year ended 31 December 2012 there would be no change to the entities which are consolidated within the Group financial statements and therefore no impact to the primary financial statements.

1.7 re-presentation of 2011 financial informationDuring 2012, the Group underwent a reorganisation as described on page 9. A new operating model and structure was put in place, creating five Market units – four geographic and one global.

As a result, the segmental disclosures for the comparative period have been restated to reflect the new structure. The Group reorganisation has no effect on aggregated amounts presented in the income statement, but does impact on the segmental disclosures. The new segments reported for the first time in the segmental analysis information (see Section 2.0) are: Australia and new Zealand, uK, Spain and Latin America Domestic, International Development Markets and International PMI.

The 2011 balance sheet has also been re-presented to disclose the following:

° Restricted assets (2011: £45.3m) separately from cash and cash equivalents (see Sections 3.0.3 and 3.0.4).

° Derivative assets (2011: £81.7m) and derivative liabilities (2011:£8.8m) separately from trade and other receivables and trade and other payables respectively (see Sections 3.0.1, 3.0.6 and 5.2).

2.0OPERATInG SEGMEnTS

operating segments in BriefThe Group is managed through five Market units based on our 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 segment results include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. These results are based on profit (including share of post taxation results of equity

accounted investments) before amortisation of intangible assets arising on business combinations, depreciation costs, other income and charges, financial income and expenses, taxation expense and non-controlling equity interests.

unallocated results comprise income and expenses generated from the corporate 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, international health cover and optical care sold in the Australian market

nursing, residential and respite care in Australia and new Zealand

Retirement villages and telecare services within new Zealand

uK health insurance and related products

nursing, residential and respite care

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 domestic markets within Spain

Management and operation of hospitals and dental centres in Spain providing medical and ancillary services to patients

Provision of nursing, residential and respite care in Spain

International Development Markets

Domestic health insurance and related products within Saudi Arabia, India, hong Kong, Thailand and China

Care management and analytic services in the uSA

International PMI International health insurance to individuals, small businesses and corporate customers

70 Bupa annual report 2012 nOTES TO ThE FInAnCIAL STATEMEnTS

NOTES TO THE FINANCIAL STATEMENTS continuedfor the year ended 31 December 2012

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

Australia and New Zealand UK

Spain and Latin America

Domestic

International Development

Markets International

PMI Total

2012

£m

2011 (restated)

£m

2012

£m

2011 (restated)

£m

2012

£m

2011 (restated)

£m

2012

£m

2011 (restated)

£m

2012

£m

2011 (restated)

£m

2012

£m

2011

£m

(i) RevenuesTotal revenues for

reportable segments 3,554.0 3,252.8 2,529.4 2,507.0 1,190.8 1,212.6 228.2 245.8 872.0 795.9 8,374.4 8,014.1Inter segment elimination – – (0.6) (0.8) – – (0.9) (1.6) – – (1.5) (2.4)External revenues for

reportable segments 3,554.0 3,252.8 2,528.8 2,506.2 1,190.8 1,212.6 227.3 244.2 872.0 795.9 8,372.9 8,011.7

net reclassifications to other expenses or financial income and expenses 0.9 4.4

unallocated central revenues 0.1 2.0Consolidated total revenues 8,373.9 8,018.1

(ii) Segment resultProfit for reportable segments* 278.3 249.0 109.7 140.9 113.4 106.1 (11.5) (9.1) 96.2 84.9 586.1 571.8Amortisation of intangible assets (16.8) (16.4) (2.7) (2.7) (2.3) (2.3) – (8.5) (5.0) (5.0) (26.8) (34.9)

261.5 232.6 107.0 138.2 111.1 103.8 (11.5) (17.6) 91.2 79.9 559.3 536.9net reclassification to financial

income and expenses (8.7) (4.1)unallocated central expenses (18.6) (10.9)Profit** 532.0 521.9

Impairment of goodwill – – – – – – – (165.8) – – – (165.8)Impairment of intangible assets

arising on business combinations – (57.5) – – – (0.9) – (75.3) – – – (133.7)Other income and charges (3.2) (22.9)Profit before financial

income and expenses 528.8 199.5Financial income and expenses 54.8 20.5

Consolidated profit before taxation expense 583.6 220.0

(iii) Other informationAmortisation and depreciation

costs for reportable segments 47.2 47.1 91.6 88.5 28.4 25.9 8.3 20.7 15.0 11.5 190.5 193.7non-cash (expenses) / income***

for reportable segments (186.6) 1.9 (80.5) (86.8) 13.1 32.1 (9.9) (6.9) (33.4) 0.1 (297.3) (59.6)unallocated non-cash income 11.8 43.9Total non-cash expenses (285.5) (15.7)

Notes* Profit for reportable segments includes share of post taxation results of

equity accounted investments** Profit before impairment of goodwill, impairment of intangible assets arising

on business combinations, other income and charges and financial income and expenses

*** Other than amortisation and depreciation costs

FINA

NC

IAL STA

TEM

EN

TS


(iv) Geographic informationAustralasia UK Spain Rest of the Worlda Total

2012

£m

2011 (restated)

£m

2012

£m

2011 (restated)

£m

2012

£m

2011 (restated)

£m

2012

£m

2011 (restated)

£m

2012

£m

2011

£m

Consolidated total revenues 3,554.0 3,252.8 2,999.0 2,933.2 1,190.8 1,212.6 630.1 619.5 8,373.9 8,018.1Consolidated non-current assetsb 2,349.6 2,316.4 1,953.3 1,962.8 453.7 363.7 112.9 146.6 4,869.5 4,789.5

Notesa. Included within Rest of the World are operations in the uSA, Saudi Arabia,

Africa, Asia Pacific and Latin America.b. Consolidated non-current assets excludes financial investments, assets arising

from insurance business, deferred taxation assets, restricted assets and post employment benefit net assets.

2.1REvEnuES

revenues in BriefThe Group generates revenues from its underwriting activities (insurance premiums) and trading activities through the provision of insurance management services (insurance service contracts) and the provision of healthcare services (care, health 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. The contracts mainly relate to the administration of claims funds on behalf of corporate customers. Revenues from service contracts represent the profit receivable on such contracts and 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 and other

The Group generates income from fees receivable from the operation of its care homes, hospitals and other healthcare and wellbeing centres. Revenues are recognised in the period in which services are provided. These revenues are stated net of value added taxation and other sales taxes, rebates and discounts.

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.


total revenues2012

£m2011 £m

Gross premiums written 6,904.9 6,448.0Change in gross provision for unearned premiums (212.1) (68.1)Gross insurance premiums 6,692.8 6,379.9

Gross premiums written ceded to reinsurers (29.2) (39.4)Reinsurers’ share of change in gross provision for unearned premiums – 5.0Premiums ceded to reinsurers (29.2) (34.4) Net insurance premiums earned 6,663.6 6,345.5

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

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 incurreD

2012 £m

2011 £m

Insurance claims paid 5,255.3 5,111.8Change in gross provisions for claims 45.8 (52.4)

5,301.1 5,059.4Risk Equalisation Trust Fund levy (113.2) (110.9)Insurance claims incurred 5,187.9 4,948.5

Recoveries from reinsurers on claims paid (20.6) (22.7)Reinsurers’ share of change in gross provisions for claims 5.1 (6.3)Reinsurers’ share of claims incurred (15.5) (29.0) Net insurance claims incurred 5,172.4 4,919.5


FINA

NC

IAL STA

TEM

EN

TS


2.3OThER OPERATInG EXPEnSES

other operating expenses in BriefOther operating expenses are costs incurred by the Group as a consequence of operations. This includes staff costs, overheads, depreciation, amortisation of intangible assets and gains or losses on foreign exchange transactions.

Operating expenses exclude finance costs and taxation.

other operating expenses2012

£m2011 £m

Staff costs (a) 1,292.0 1,216.2Acquisition costs (b) 200.3 189.2Cost of sales 171.5 156.0Property costs 157.2 170.8Marketing costs 115.7 125.8Medical supplies and fees 174.4 165.3Operating lease rentals 63.5 51.1

net gain on foreign exchange transactions (0.8) (0.2)

Amortisation of intangible assets 83.1 87.7Depreciation expense 107.4 106.0

Other operating expenses (including auditors’ remuneration) (c) 308.1 306.4Total other operating expenses 2,672.4 2,574.3

(a) Staff costs and employee numbers(i) Staff costs

2012 £m

2011 £m

Wages and salaries 1,155.3 1,091.5Social security costs 93.7 93.0Contributions to defined contribution scheme 23.7 23.8Other pension costs 19.3 7.9Total staff costs 1,292.0 1,216.2

Directors’ Remuneration report is described in pages 54 to 58 of this report.

(ii) Employee numbersThe average number of full time equivalent employees, including Executive Directors, employed by the Group during the year was:

2012 2011

health insurance 11,830 10,415Care and health provision 33,120 32,073Total employee numbers 44,950 42,488

(b) Acquisition costs2012

£m2011 £m

Commission for direct insurance 189.0 175.2Other acquisition costs paid 17.3 15.8Changes in deferred acquisition costs (6.0) (1.8)Total acquisition costs 200.3 189.2

(c) Auditors’ remuneration2012

£m2011 £m

Fees payable to the Company’s auditor for the audit of the Company’s annual accounts 0.7 0.6

Fees payable to the Company’s auditor and its associates for: – the audit of the Company’s subsidiaries

pursuant to legislation 3.0 2.7– audit-related assurance services 0.7 0.8

Total audit fees payable to the Company’s auditors, KPMG Audit Plc and its associates 4.4 4.1

Fees payable to other auditors:Audit of overseas subsidiary companies 0.1 0.2

Total audit fees 4.5 4.3Fees payable to the Company’s auditor and its

associates for other services: Tax compliance services 0.3 0.3Tax advisory services 0.2 0.2Other assurance services 0.4 1.0

Corporate finance services 0.3 0.2All other non-audit services 0.1 0.1

Total non-audit fees 1.3 1.8Total auditors’ remuneration 5.8 6.1

In addition, fees in respect of the audit of The Bupa Pension Scheme were £41,000 (2011: £41,000).


2.4OThER InCOME AnD ChARGES

other income anD charges in BriefOther income and charges comprise income or expenses that are not related to the operating activities of the Group and not reported in other operating expenses, financial income or financial expenses.

other income anD charges2012

£m2011 £m

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

Impairment of property is explained in Section 3.2.

2.5FInAnCIAL InCOME AnD EXPEnSES

financial income anD expenses in BriefFinancial income and expenses are earned / (incurred) from the Group’s financial assets and liabilities.

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.

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.

2012 £m

2011 £m

Interest income: Loans and receivables 84.4 81.3Investments held to maturity 6.4 5.7Investments designated at fair value through

profit or loss 1.7 0.5net realised gains on financial investments

designated at fair value through profit or loss – 0.7

net increase in fair value:Investments designated at fair value through

profit or loss 27.1 4.0Investment property 6.6 3.8

net foreign exchange loss (1.6) (1.0)Total financial income 124.6 95.0

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

financial expensesInterest payable on borrowings is calculated using the effective interest method.

The net amount of foreign exchange differences recognised in financial expenses for the year, excluding those arising on financial assets and financial liabilities measured at fair value through profit or loss was £nil (2011: £nil).

2012 £m

2011 £m

Interest expense on financial liabilities at amortised cost 68.4 72.8

Finance charges in respect of finance leases 0.1 0.1Other financial expenses 1.3 1.6Total financial expenses 69.8 74.5


FINA

NC

IAL STA

TEM

EN

TS


2.6TAXATIOn EXPEnSE

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

The taxation expense on the profit for the year comprises 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 comprehensive income.

(i) Recognised in the income statement2012

£m2011 £m

Current taxation expenseuK taxation on income for the year 66.0 63.4Adjustments in respect of prior periods (24.6) (38.7)

41.4 24.7Double taxation relief (1.6) (2.2)

Foreign taxation on income for the year 102.8 80.8Adjustments in respect of prior periods 0.4 (8.4)

103.2 72.4 Total current taxation 143.0 94.9

Deferred taxation (income) / expenseOrigination and reversal of temporary

differences (0.6) (19.6)Adjustments in respect of prior periods (9.7) 8.2Changes in taxation rates 2.2 0.6

Total deferred consideration (8.1) (10.8)Taxation expense 134.9 84.1

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 tax 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 tax 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 determination is made.

(ii) Reconciliation of effective taxation rate2012

£m2011 £m

Profit before taxation expense 583.6 220.0Taxation at the domestic uK corporation

taxation rate of 24.5% (2011: 26.5%) 143.0 58.3

Effect of:Different taxation rates in foreign jurisdictions 12.0 (4.6)non-deductible expenses 3.3 59.1Current income taxation adjustments

in respect of prior periods (24.2) (47.1)Deferred taxation adjustments

in respect of prior periods (9.7) 8.2Changes in taxation rate 2.2 0.6Movement on deferred taxation

asset not recognised 8.3 9.6Taxation expense at the effective

taxation rate of 23.1% (2011: 38.2%) 134.9 84.1

(iii) Current and deferred taxation recognised directly in other comprehensive income

2012 2011

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:Actuarial gain on pension schemes – – – – 6.5 6.5Foreign exchange translation differences on goodwill (40.7) – (40.7) 3.4 – 3.4Other foreign exchange translation differences (39.4) (0.2) (39.6) (5.8) 0.5 (5.3)net gain on hedge of net investment in overseas subsidiary companies 5.3 – 5.3 7.8 – 7.8Realisation of cash flow hedge – – – (1.3) – (1.3)Loss on cash flow hedge on LuX MED acquisition (2.2) – (2.2) – – –Acquisition of subsidiary companies attributable to

non-controlling interest 5.8 – 5.8 – – –Acquisition of non-controlling interest in subsidiary company (5.3) – (5.3) – – –Other movements in non-controlling interests – 0.1 0.1 – 0.1 0.1Deferred taxation credit / (charge) in respect of:unrealised loss on revaluation of property (17.0) 9.1 (7.9) (31.1) 13.7 (17.4)Actuarial gain / (loss) on pension schemes 18.5 (1.0) 17.5 (93.0) 12.2 (80.8)Change in fair value of underlying derivative of cash flow hedge (0.8) 0.2 (0.6) (1.0) 0.2 (0.8)Taxation credit on income and expenses recognised directly in other

comprehensive income (75.8) 8.2 (67.6) (121.0) 33.2 (87.8)


(iv) Factors that may affect future tax chargesThe Budget statement in December 2012 announced that the uK corporation tax rate will reduce to 21% by 2014. A reduction to 23% (effective from 1 April 2013) was enacted on 3 July 2012. The company’s deferred tax balances have been provided for at 23% (25% at 31 December 2011), being the rate that was substantively enacted at 31 December 2012.

The effect of the reduction in the uK corporation rate to 21% would create an additional reduction in the deferred tax balance of £5.3m. This has not been reflected in the figures above as it was not substantively enacted at the balance sheet date.

3.0WORKInG CAPITAL

working capital in BriefWorking capital represents the assets and liabilities arising from underwriting and trading activities. The Group therefore defines working capital as trade and other receivables, assets arising from insurance business, cash, restricted assets, inventories and trade and other payables.

3.0.1 traDe anD other receivaBlesTrade and other receivables are carried at amortised cost less impairment losses.

2012 £m

2011 £m

non-currentInvestment receivables and

accrued investment income 2.3 2.1Other receivables 1.0 4.8Service concession receivables (a) 106.3 33.7Prepayments 9.3 12.0Accrued income 3.0 3.1Total non-current other receivables 121.9 55.7

currentTrade receivables

– net of impairment losses (b) 126.6 122.8Investment receivables and

accrued investment income 0.7 0.7Other receivables 74.9 35.6Service concession receivables (a) 152.1 103.8Prepayments 46.9 36.5Accrued income 3.5 4.4Total current trade and other receivables 404.7 303.8

Total trade and other receivables 526.6 359.5

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 receivable and accrued investment income is £2.1m (2011: £1.8m). The carrying value of the other non-current receivable balances are 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. In December 2012, an arrangement with the Madrid government was entered into, where 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. At the end of the contracts, ownership of the hospitals reverts to the grantors. The service concession receivables are carried at amortised cost less impairment losses.

(b) Impairment of financial assetsFinancial assets comprise trade and other receivables, investment properties and financial investments. Refer to Section 3.3 for investment properties and Section 5.0 for financial investments.

If they are not already 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 £0.7m (2011: £1.7m) and on investment receivables amounting to £nil (2011: £0.1m) have been charged to other operating expenses in the income statement.


FINA

NC

IAL STA

TEM

EN

TS


3.0.2 assets arising from insurance BusinessAssets arising from insurance business are held at amortised cost less impairment losses.

2012 £m

2011£m

non-currentReinsurers’ share of insurance provisions (a) – 3.1Deferred acquisition costs (b) 0.6 1.8Total non-current assets arising from

insurance business 0.6 4.9

currentInsurance debtors (c) 692.5 656.5Reinsurers’ share of insurance provisions (a) 13.6 16.3Deferred acquisition costs (b) 68.7 62.0Medicare rebate (d) 73.8 70.9Risk Equalisation Trust Fund recoveries 21.8 23.1Total current assets arising from

insurance business 870.4 828.8

Total assets arising from insurance business 871.0 833.7

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.

(a) 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.

(b) 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:

2012 £m

2011 £m

At beginning of year 63.8 63.7Acquisition costs deferred 282.7 273.8Acquisition costs released to income statement (276.7) (271.7)Foreign exchange (0.5) (2.0)At end of year 69.3 63.8

(c) Insurance debtorsImpairment losses in respect of insurance debtors amounting to £10.7m (2011: £13.5m) have been charged to other operating expenses in the income statement.

(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 that are repayable on demand and form an integral part of the Group’s cash management (see Section 5.3) are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.

2012 £m

2011£m

Cash at bank and in hand 447.7 440.1Short-term deposits 808.0 743.0Cash and cash equivalents 1,255.7 1,183.1

Bank overdrafts (2.3) (0.1)Cash and cash equivalents

in the statement of cash flows 1,253.4 1,183.0

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.

2012 £m

2011 £m

non-current restricted assets 44.0 39.4Current restricted assets 8.7 5.9Total restricted assets 52.7 45.3

The non-current restricted assets balance of £44.0m (2011: £39.4m) consists of cash deposits held to secure a charge over the non-registered pension arrangement maturing after 2022 (see Section 6.0 (ii)). Included in current restricted assets is £2.3m (2011: £nil) 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 and consumables were £19.9m (2011: £16.5m).

Inventory write downs of £0.1m (2011: £nil) were made during the year. The Group consumed £216.5m (2011: £176.8m) of inventories, which are recognised within other operating expenses in the income statement.

Certain inventories are subject to a floating charge in respect of certain interest bearing liabilities (see Section 5.1).


3.0.6 traDe anD other payaBlesTrade and other payables are carried at amortised cost.

2012 £m

2011 £m

non-currentDeferred income (a) 1.3 1.5Other payables 9.0 1.7Accruals 9.6 9.1Total non-current other payables 19.9 12.3

currentTrade payables 138.3 114.2Social security and other taxes 31.2 27.8Deferred income (a) 61.5 71.5Other payables 183.0 154.3Accommodation bond liabilities (b) 263.9 230.1Accruals 304.5 302.7Total current trade and other payables 982.4 900.6 Total trade and other payables 1,002.3 912.9

The fair values of other payables and accruals are £191.5m (2011: £156.0m) and £313.9m (2011: £311.8m) respectively. The carrying value of the other trade and other payables is a reasonable approximation of the fair value. Information regarding the ageing of trade payables, other payables, accommodation bond liabilities and accruals is shown in Section 5.4.3.

(a) Deferred revenueIn 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 the residents of the care homes in Australia as payment for a place in the care home facility. These deposits are payable 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 bond holder.

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 balance sheet.

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 10 years

° Brand and trademarks 10 years

° Technology and Databases 10 years

° Distribution networks 10 to 11 years

° Customer relationships 10 to 21 years

° Present value of acquired in-force business 13 to 20 years

° Licences to operate care homes term of licence

° non-compete agreements term of agreement

° 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.


FINA

NC

IAL STA

TEM

EN

TS


intangiBle assets

Goodwill £m

Computer software

£m

Customer relation-

ships £m

Other £m

Total £m

2012costAt beginning of year 2,253.4 521.3 331.3 333.9 3,439.9Assets arising on business combinations 6.3 – – 4.1 10.4Additions – 67.0 0.6 – 67.6Disposals – (28.8) – – (28.8)Other – 1.1 – – 1.1Foreign exchange (59.3) (6.7) (9.6) (8.6) (84.2)At end of year 2,200.4 553.9 322.3 329.4 3,406.0

amortisation and impairment lossAt beginning of year 611.8 329.2 130.3 159.8 1,231.1Amortisation for year – 56.5 20.3 6.3 83.1Impairment loss – 6.3 – – 6.3Disposals – (27.9) – – (27.9)Foreign exchange (18.6) (5.5) (4.4) (4.2) (32.7)At end of year 593.2 358.6 146.2 161.9 1,259.9

Net book value at end of year 1,607.2 195.3 176.1 167.5 2,146.1net book value at beginning of year 1,641.6 192.1 201.0 174.1 2,208.8

2011costAt beginning of year 2,238.3 451.8 329.2 333.1 3,352.4Assets arising on business combinations 5.8 – 0.3 0.7 6.8Additions – 63.9 – – 63.9Disposals – (2.9) – – (2.9)Other – 9.1 – – 9.1Foreign exchange 9.3 (0.6) 1.8 0.1 10.6At end of year 2,253.4 521.3 331.3 333.9 3,439.9

amortisation and impairment lossAt beginning of year 440.2 242.5 69.0 83.5 835.2Amortisation for year – 57.8 22.3 7.6 87.7Impairment loss 165.8 31.0 37.0 67.3 301.1Disposals – (2.8) – – (2.8)Other – (0.3) – – (0.3)Foreign exchange 5.8 1.0 2.0 1.4 10.2At end of year 611.8 329.2 130.3 159.8 1,231.1

Net book value at end of year 1,641.6 192.1 201.0 174.1 2,208.8net book value at beginning of year 1,798.1 209.3 260.2 249.6 2,517.2

Impairment of other intangible assets arising on business combinationsDuring the year, impairment of other intangible assets arising on acquisitions totalled £nil (2011: £135.0m).


Intangible assets of £2,146.1m (2011: £2,208.8m) includes £343.6m (2011: £375.1m) which is attributable to other intangible assets arising on business combinations (included within Computer software, Customer relationships and Other) as follows:

2012 £m

2011 £m

Customer relationships 176.1 201.0Bed licences (within Bupa Care Services

Australia) 101.3 100.5Licences to operate care homes 45.9 50.0Leases 12.1 12.9Distribution networks 6.3 8.7Present valuation of acquired in-force business 1.3 1.4Brand and trademarks 0.6 0.6Total 343.6 375.1

Impairment of intangible assetsGoodwill and intangible 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 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 PMI businesses, fee rate and occupancy for our care services businesses and revenue growth and gross margins for our Bupa home healthcare and Bupa Cromwell hospital businesses.

Except for Bupa Care Services Australia, Bupa Care Services uK and The Bupa Cromwell hospital, 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 Australia, Bupa Care Services uK and The Bupa Cromwell hospital have been based on a periods of five, four and eight years respectively. A longer period was justified for these CGus as management believes that this is an appropriate timescale over which to look at the annual cash flow projections before applying the terminal growth rate to the final year. Taxation has been applied to the pre-taxation management operating profits based on the statutory taxation rates in the country of operation.

Future post-taxation cash flows have been discounted at post-taxation discount rates. Discount rates used for the value in use calculations for each of the Group’s CGus are based on consideration 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.

The following table summarises the pre-taxation discount rates used for impairment testing:

2012 %

2011 %

Bupa Australia 12.1 12.9Bupa Care Services Australia 9.2 8.9Bupa Care Services uK 8.5 9.0Bupa International 11.2 12.3Bupa Care Services new Zealand 9.4 9.6Bupa home healthcare 15.6 14.4The Bupa Cromwell hospital 12.5 14.0Other – range of discount rates 12.7–14.6 15.0–15.3

Cash flow projections beyond the forecast periods have been extrapolated by applying a terminal growth rate between 1.0% and 3.0% (2011: 1.0% and 3.0%) for all CGus. The terminal growth rates represent management’s 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. They are conservative estimates which do not exceed the long-term average growth rate for the respective industries, countries or markets in which the CGus operate.

The values assigned to the key assumptions are based on management’s past experience and assessment of future trends in the relevant industry.

Impairment of goodwillAt 31 December 2012, the recoverable amount of each of the CGus is determined to be higher than their respective carrying amounts, resulting in no impairment to goodwill and intangible assets with indefinite useful lives.

In 2011, the goodwill relating to the health Dialog CGu (acquired in 2008) was fully impaired, resulting in an impairment charge of £165.8m. health Dialog is a uS based provider of health analytics and care management services that helps health plans, public insurers and employers manage the cost and quality of healthcare. Due to the weakening of the economic conditions in the uS, the uncertainty that existed in the uS healthcare market arising from healthcare reform and an increasing trend in the market towards in-sourcing, the outlook for the business had become more challenging. The main assumptions on which the cash flow projections were based included revenue growth and gross margin. The key valuation assumptions used to test the carrying value of goodwill included a pre-taxation discount rate of 14.0% and a terminal growth rate of 2.0%.

The following table summarises goodwill by CGu as at 31 December:

2012 £m

2011£m

Bupa Australia 948.3 978.7

Bupa Care Services Australia 308.3 316.5

Bupa Care Services uK 178.2 178.2

Bupa International 59.3 59.3

Bupa Care Services new Zealand 34.5 31.5

Sanitas PMI 24.3 24.8

Bupa home healthcare 20.7 20.5

The Bupa Cromwell hospital 16.2 16.2

Bupa Latin America 8.5 8.5

Other 8.9 7.4Total 1,607.2 1,641.6

Impairment of intangible assets with indefinite useful lives There have been no impairments during the year to intangible assets with indefinite useful lives (2011: £58.6m impairment to the MBF brand held by Bupa Australia).

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 2012.

Other than as disclosed in the following page, management believes that no reasonably possible change in any of the above key assumptions would cause the carrying value of any goodwill or intangible asset with an indefinite useful life to exceed its recoverable amount.


FINA

NC

IAL STA

TEM

EN

TS


It is possible that a change in key assumptions could cause the impairment of goodwill for The Bupa Cromwell hospital, Bupa Care Services new Zealand, Bupa Care Services uK and Bupa Care Services Australia. The table below shows the decrease required in the terminal growth rate and increase required in discount rate for the recoverable amount of goodwill to equal carrying amount, with the exception of The Bupa Cromwell hospital, for which recoverable amount will be greater than carrying value with a zero terminal growth rate.

headroom £m

Terminal growth

rate %

Decrease in terminal

growth rate %

Increase in discount

rate %

The Bupa Cromwell hospital 42.6 2.0 2.0 2.6

Bupa Care Services new Zealand 6.6 3.0 0.1 0.1

Bupa Care Services uK 470.7 2.4 2.0 1.7Bupa Care Services

Australia 206.4 3.0 1.8 1.6

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.

The majority of the assets held relate to care home and hospital properties and equipment and office buildings.

freeholD anD leaseholD properties Freehold and leasehold properties comprise care homes, hospitals and offices. These properties are shown at fair value based on periodic, but at least triennial, valuations performed by external independent valuers, less subsequent depreciation and impairment losses. The valuations are performed with sufficient regularity to ensure that the carrying value does not differ significantly from fair value at the balance sheet date. Directors’ valuations are performed in interim years where impairment indicators exist.

Revaluation of propertiesFair value for care homes and hospitals is considered to be existing use value. valuations of office buildings are on a market value basis. Borrowing costs relating to the acquisition or construction of qualifying assets are capitalised as part of the cost of that asset.

The revaluation of properties was carried out independently by Knight Frank and Darroch, Chartered Surveyors. The revaluations were effective as of 31 December in the year in which they were undertaken.

The fair value of corporate use properties was determined mainly by reference to active market prices.

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.

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

Freeholdproperty

£m

Leaseholdproperty

£m

valuation – December 2012 65.3 0.9valuation – December 2011 68.2 –valuation – December 2010 1,720.9 71.0Assets held at cost 163.0 97.7Cost or valuation 2,017.4 169.6

Gains and losses on revaluation are recognised in the revaluation reserve, except where an asset is revalued below historical cost, in which case the deficit is recognised in the income statement. Where a revaluation reverses deficits taken to the income statement in prior years, then it is credited to the income statement.


Historical cost of the Group’s revalued assetsA net £19.4m revaluation gain (2011: £8.7m) and £36.4m impairment loss (2011: £39.8m) have been recognised in the property revaluation reserve.

In 2012, a revaluation deficit of £0.7m (2011: £0.4m) and impairments of £11.0m (2011: £20.9m) were charged to the income statement (see section 2.4).

The entire net £18.7m revaluation surplus (2011: £8.3m) was valued by external valuers. The total £47.4m property impairment arose from internal assessments (2011: £60.7m).

2012 £m

2011 £m

historical cost of revalued assets 1,617.8 1,533.0Accumulated depreciation based

on historical cost (220.8) (197.8)Historical cost net book value 1,397.0 1,355.2DepreciationDepreciation charge for the year

on historical cost 32.4 30.7

The historical cost of all property, plant and equipment is £2,354.5m (2011: £2,244.1m).

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 revalued amount is recognised in the revaluation reserve, except where an asset is revalued below historical cost, in which case the deficit is recognised in the income statement within other income and charges.

leaseD assetsLeases are classified as finance leases when the terms of the lease transfer substantially 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 or, if lower, at the present value of the minimum lease payments and depreciated over the shorter of their useful economic life and the lease term.

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. 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 Section 2.3 other operating expenses.

The amounts included in property, plant and equipment in respect of assets held under finance leases are as follows:

Leasehold property

£mEquipment

£mTotal

£m

net book valueAt beginning of year 1.0 1.5 2.5At end of year 1.0 1.0 2.0DepreciationCharge for year – 0.5 0.5


FINA

NC

IAL STA

TEM

EN

TS


property, plant anD equipmentFreehold property

£m

Leasehold property

£mEquipment

£mTotal

£m

2012cost or valuationAt beginning of year 1,920.5 165.0 711.1 2,796.6Additions through business combinations 32.4 – 0.3 32.7Additions 72.3 7.8 98.8 178.9Disposals (8.7) (1.3) (64.4) (74.4)Revaluations 17.1 (0.7) – 16.4Other (0.4) 0.2 (0.9) (1.1)Foreign exchange (15.8) (1.4) (8.4) (25.6)at end of year 2,017.4 169.6 736.5 2,923.5

Depreciation and impairment lossAt beginning of year 88.4 40.5 395.2 524.1Depreciation charge for year 30.2 8.8 68.4 107.4Disposals (7.7) (0.3) (62.8) (70.8)Revaluations (2.3) – – (2.3)Impairments 43.8 3.6 0.4 47.8Reclassification (0.1) 0.1 – –Foreign exchange (0.7) (0.6) (4.8) (6.1)at end of year 151.6 52.1 396.4 600.1

Net book value at end of year 1,865.8 117.5 340.1 2,323.4net book value at beginning of year 1,832.1 124.5 315.9 2,272.5

2011cost or valuationAt beginning of year 1,897.3 159.9 705.9 2,763.1Additions through business combinations – – 3.6 3.6Additions 40.3 11.4 96.0 147.7Disposals (3.9) (6.6) (81.7) (92.2)Revaluations (12.6) 0.1 – (12.5)Other (0.5) 0.2 (8.7) (9.0)Foreign exchange (0.1) – (4.0) (4.1)at end of year 1,920.5 165.0 711.1 2,796.6

Depreciation and impairment lossAt beginning of year 21.5 37.4 409.5 468.4Depreciation charge for year 30.1 9.1 66.8 106.0Disposals (2.8) (6.3) (80.1) (89.2)Revaluations (20.0) – – (20.0)Impairments 59.2 – 0.7 59.9Other 0.3 0.1 (0.1) 0.3Foreign exchange 0.1 0.2 (1.6) (1.3)at end of year 88.4 40.5 395.2 524.1

Net book value at end of year 1,832.1 124.5 315.9 2,272.5net book value at beginning of year 1,875.8 122.5 296.4 2,294.7

An impairment on freehold property and equipment of £47.8m (2011: £59.9m) arose in connection with the Directors’ impairment review of the care home portfolio where the decline in future profitability since the last valuation is considered to be of a long-term nature.

no impairment of land arose from this review (2011: £0.8m).

Recognised in the carrying amount of freehold property is £14.2m (2011: £0.6m) 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.


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.

The vast majority 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, an independent valuer, holding a recognised and relevant professional qualification and with recent experience in the location and category of investment property being valued, values the portfolio annually.

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.

See Section 3.0.1 for the impairment accounting policy for investment properties.

(i) Investment properties2012

£m2011 £m

At beginning of year 132.5 120.3Additions 19.3 7.4Increase in fair value 6.9 4.1Foreign exchange 1.2 0.7At end of year 159.9 132.5

The historical cost of investment properties is £134.6 (2011: £114.2m).

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

The remaining carrying value of investment properties of £152.5m (2011: £123.4m), 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.

Investment 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.

(ii) leases as lessorThe Group leases out its investment properties under operating leases. The future lease receipts under non-cancellable leases are as follows:

2012 £m

2011 £m

Less than one year 0.8 1.2Between one and five years 0.8 2.3Total 1.6 3.5

During the year ended 31 December 2012, £1.0m (2011: £1.1m) was recognised as rental income in the income statement.


FINA

NC

IAL STA

TEM

EN

TS


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 consists 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.

Provision is made for unexpired risks where the claims and administrative expenses 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.

2012 2011

noteGross

£m

Re- insurance

£mNet £m

Gross £m

Re- insurance

£mnet £m

general insurance businessProvisions for unearned premiums a 1,547.7 (7.5) 1,540.2 1,353.7 (7.6) 1,346.1Provisions for claims b 809.4 (5.4) 804.0 785.0 (11.0) 774.0

long-term businessProvisions for life insurance benefits 22.9 (0.7) 22.2 23.5 (0.8) 22.7Total insurance provisions 2,380.0 (13.6) 2,366.4 2,162.2 (19.4) 2,142.8

non-current 24.8 – 24.8 25.7 (3.1) 22.6

Current 2,355.2 (13.6) 2,341.6 2,136.5 (16.3) 2,120.2

Total insurance provisions 2,380.0 (13.6) 2,366.4 2,162.2 (19.4) 2,142.8

(a) analysis of movements in provisions for unearned premiumsAt beginning of year 1,353.7 (7.6) 1,346.1 1,292.1 (4.6) 1,287.5Premiums deferred 6,900.6 (27.4) 6,873.2 6,425.6 (94.1) 6,331.5Deferred premiums released to income (6,688.5) 27.4 (6,661.1) (6,361.6) 91.3 (6,270.3)Foreign exchange (18.1) 0.1 (18.0) (2.4) (0.2) (2.6)At end of year 1,547.7 (7.5) 1,540.2 1,353.7 (7.6) 1,346.1

(b) analysis of movements in provisions for claimsAt beginning of year 785.0 (11.0) 774.0 843.2 (3.9) 839.3Cash paid to settle claims (5,139.7) 18.9 (5,120.8) (4,994.9) 18.8 (4,976.1)Decrease for prior years’ claims (52.7) (0.3) (53.0) (62.9) 2.0 (60.9)Increase for current year claims 5,350.1 (13.4) 5,336.7 5,114.2 (27.6) 5,086.6Increase in Risk Equalisation Trust Fund levy (113.2) – (113.2) (110.9) – (110.9)Foreign exchange (20.1) 0.4 (19.7) (3.7) (0.3) (4.0)At end of year 809.4 (5.4) 804.0 785.0 (11.0) 774.0


Assumptions for general insurance businessThe process of recognising liabilities arising from general insurance contracts requires the exercise of judgement in relation to estimating future claims payments, claims handling expenses and unexpired risk provisions. The principal assumption affecting the measurement of liabilities is that the nature of recent claims development profile of the Group’s insurance entities and that current claims experience will be consistent with recent trends. Other assumptions are also applied in measuring the Group’s insurance liabilities but have a less material effect. The aim of these assumptions is to arrive at the best estimate of future obligations and cash outflows of the Group. A margin for adverse deviation is reflected within the estimates.

Claims development patterns are analysed in each of the Group’s general insurance entities and, in some cases, are further sub-analysed where an entity has distinct portfolios of general insurance with distinct characteristics. The characteristics may differ by product line, risk profile, geographic sector or market sector. The analysis is used to determine a claims settlement pattern using recent experience, adjusted where appropriate by observed trends over time. Claims are assessed on a case by case basis. Extrapolation methods based on the claims settlement pattern are used: these are recognised methods described in the Institute and Faculty of Actuaries Claims Reserving Manual (1997). Large homogeneous sections of insurance business (eg corporate business in a specific region) are often analysed by more than one method, such as the chain ladder, Bornhuetter-Ferguson and paid claim loss ratio methods. Additional industry accepted refinements are made to allow for, but not limited to, the treatment of large claims, claim seasonality, claims inflation and currency conversions.

While there is some diversity in the claims development profile across the Group, the Group’s general insurance contracts principally relate to healthcare benefits that occur with stable frequencies and exhibit very short development patterns that can be characterised in months rather than years. Less automated medical insurance portfolios may have development patterns extending out from 12 to 18 months, whereas pre-authorisation electronic claims settlement and network provider arrangements may produce development patterns of four to six months.

Insurance provisions are estimates. Actual experience may vary, primarily as a result of claims or administrative expenses being different than expected. The following table shows the sensitivities to such variation from expectations.

Increase in claims

Increase in expenses

2012Change in variable % 5.0 10.0Reduction in profit net of

reinsurance before taxation £m 59.8 19.0

2011Change in variable % 5.0 10.0Reduction in profit net of

reinsurance before taxation £m 52.2 18.0

These variances would lower the amount of profit that would otherwise be expected to emerge in subsequent periods. Since premium provisions include profit margins and claims provisions include margins of prudence, variance from expectations by the amounts shown will be absorbed by these margins for the current book of business.

Liability adequacy testsLiability adequacy tests are performed for insurance portfolios on the basis of estimates of future claims, costs and premiums earned. For short duration contracts, a premium deficiency is recognised if the sum of expected claim costs and claim adjustment expenses, capitalised deferred acquisition costs, and maintenance expenses exceeds related unearned premiums while considering anticipated investment income.

3.4.2 other liaBilities unDer insurance contract issueDOther liabilities under insurance contract issued consists of payables to insurance creditors other than policyholders.

2012 £m

2011 £m

Reinsurers’ deposits 4.6 4.3Reinsurance payables – 0.3Commissions payable 8.5 6.0Other insurance payables 3.7 3.1Total other liabilities under insurance

contracts issued 16.8 13.7


FINA

NC

IAL STA

TEM

EN

TS


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 if the payments can be reliably estimated. If the effect is material, provisions are determined by discounting the 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.

provisions for liaBilities anD chargesLong

service and annual

leave £m

Insurance provisions

£m

unoccupied property

£m

Restruct- uring

provisions £m

Regulatory provisions

£mOther

£mTotal

£m

At beginning of year 39.1 15.5 8.4 0.4 3.8 15.3 82.5Acquisitions through business combinations 0.8 – – – – – 0.8Charge for year 29.4 7.4 1.7 5.8 3.8 1.8 49.9Released in year (1.1) – (3.2) (0.1) (1.6) (1.7) (7.7)utilised in year – cash (25.8) (2.6) (0.1) (0.3) (1.5) (3.3) (33.6)utilised in year – non-cash – (5.1) – – – (0.5) (5.6)Foreign exchange (1.1) – – (0.1) – (0.3) (1.5)At end of year 41.3 15.2 6.8 5.7 4.5 11.3 84.8

non-current 9.1 11.2 5.3 – – 0.7 26.3Current 32.2 4.0 1.5 5.7 4.5 10.6 58.5Total provisions for liabilities and charges 41.3 15.2 6.8 5.7 4.5 11.3 84.8

(a) 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.

(b) 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.

(c) 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.

(d) Restructuring provisionsDuring 2012, the Group was restructured to enable better alignment of our customers and markets. The above provision includes costs accrued for the restructuring that are to be met in 2013.

(e) 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.

(f) OtherOther provisions include amounts relating to legal claims, payments under legislation and deferred consideration.


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.

DefineD contriBution pension schemesThe defined contribution schemes provide benefits based on the accumulated contributions made by Bupa and the employees. The Group pays fixed contributions into the fund on behalf of the employees and these contributions are recognised as an expense in the income statement as incurred. The risks and rewards of the defined contribution schemes are assumed by the members of the schemes.

DefineD Benefit post employment schemesThe defined benefit schemes provide benefits based on final pensionable salary. The Group’s net obligation in respect of defined benefit pension and 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 benefits 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, plus the total of any unrecognised past service costs.

The charge to the income statement for defined benefit schemes represents the following: current service cost calculated on the projected unit credit method; the expected return on scheme assets, less the interest cost on scheme liabilities; and gains and losses on curtailments.

All actuarial gains and losses 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 to other operating expenses for the year are:

2012 £m

2011 £m

Current service cost 19.3 20.0Interest on obligations 52.6 51.4Expected return on scheme assets (52.8) (60.7)Gains on curtailments – (2.8)Past service cost 0.2 –Total amount charged to income statement 19.3 7.9 Actual return on scheme assets (98.5) (92.0)

The charge to other operating expenses in respect of cash contributions to defined contribution schemes is £23.7m (2011: £23.8m).

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

2012 £m

2011 £m

Actual return less expected return on assets (45.7) (31.3)Experience losses arising on obligations 0.2 58.7Changes in assumptions 27.0 65.6Total actuarial (gains) / losses (18.5) 93.0

The cumulative amount of actuarial losses recognised directly in other comprehensive income is £186.9m (2011: £205.4m).

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 join on a voluntary basis to permanent employees of The British united Provident Association Limited and Bupa Insurance Services Limited. In 2012 £23.7m (2011: £23.8m) of contributions to the defined contribution scheme were recognised in the income statement (Section 2.3 (i)). There are several other contract based defined contribution arrangements run by other employers within the Bupa Group.

Defined benefit post employment schemesThe principal defined benefit scheme in the uK is The Bupa Pension Scheme. Contributions by employees and by Bupa Group companies are administered by the Trustee in funds independent of the Group. The scheme was closed to new entrants from 1 October 2002, but its existing members continue to accrue entitlements in respect of current service.

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. The most recent triennial valuation as at 1 July 2011 was finalised during the year ended 31 December 2012.


FINA

NC

IAL STA

TEM

EN

TS


As recommended by the scheme’s independent actuary, employer contributions were paid at the rate of 24.9% of pensionable salaries for the period to 30 June 2012 and at the rate of 27.3% for the period 1 July 2012 to 31 December 2012. In addition to these employer contributions a payment equivalent to the employee contribution of 7.0% 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 2013, with regards to the accumulation of future benefits, are £8.9m in respect of The Bupa Pension Scheme and £2.0m in respect of PeopleChoice Pensions.

Following the disposal of the Group’s uK hospitals business in 2007, Bupa agreed to pay, or procure the payment of, a number of further contributions to the Trustee of the scheme. During 2012 the total of the additional payments made was £24.2m (2011: £24.5m). The payment made in 2012 is the final payment associated with this disposal and equates to the investment return that the scheme would have achieved had £98.0m been paid into the scheme at the time of the sale of the uK hospitals business, assuming that the scheme would have achieved investment returns of 7.0% per annum compound during that period.

In addition, Bupa Finance Plc (which is not an employer in respect of the scheme) had entered into a legally binding and irrevocable guarantee for the benefit of the Trustee in respect of the payments due from Bupa as set out above. This guarantee operates for the duration of these special payments and expires on the payment of the last instalment.

There are several other minor schemes operated by uK and overseas subsidiaries. Of these, the defined benefit schemes are assessed by independent scheme actuaries in accordance with uK or local practice and under IAS 19 as at 31 December 2012 for the purposes of inclusion in the Group’s consolidated financial statements. Complete disclosure of these other defined benefit schemes is not practicable within this report but are disclosed within the financial statements of the sponsoring employer of the schemes.

Unfunded schemesunfunded defined benefit pension arrangements exist for certain employees and former employees in excess of the funded pension arrangements provided by the Group. There are no separate funds or assets in the balance sheet to support the unfunded schemes; however, provisions are included in the balance sheet in respect of these liabilities.

The latest valuation of these arrangements was performed as at 31 December 2012 under IAS 19 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 2012 have been made in accordance with this latest valuation, which used the same principle assumptions as adopted at 31 December 2012 under IAS 19 for The Bupa Pension Scheme.

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 2012 by an actuary employed by the Group using the same key assumptions as adopted at 31 December 2012 under IAS 19 for The Bupa Pension Scheme.

(iii) Assets and liabilities of schemesThe assets and liabilities in respect of defined funded pension scheme, unfunded pension and post retirement medical benefit scheme are as follows:

Pension schemesPost retirement medical

benefit scheme Total

note2012

£m2011 £m

2012 £m

2011 £m

2012 £m

2011 £m

Present value of funded obligations (iv) (1,165.7) (1,091.9) – – (1,165.7) (1,091.9)Fair value of scheme assets (v) 1,260.4 1,149.0 – – 1,260.4 1,149.0net assets of funded schemes 94.7 57.1 – – 94.7 57.1Present value of unfunded obligations (iv) (37.4) (36.1) (14.9) (18.0) (52.3) (54.1)Net recognised assets / (liabilities) 57.3 21.0 (14.9) (18.0) 42.4 3.0

Represented on the balance sheet as:net assets 104.9 68.1net liabilities (62.5) (65.1)Net recognised assets 42.4 3.0


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



2012 £m

2011 £m

2012 £m

2011 £m

2012 £m

2011 £m

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

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

2012 £m

2011 £m

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

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

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

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

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

Funded schemes

unfunded schemes

note2012

%2011

%2012

%2011

%

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

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


FINA

NC

IAL STA

TEM

EN

TS


(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 scheme. 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) Expected rate of return on assetsThe overall expected return on scheme assets has been derived by calculating the weighted average expected return applied to each of the major asset classes, equities, bonds and ‘other’.

The expected return on equities and other return seeking assets has been taken as the yield on fixed interest gilts at the balance sheet date plus a margin of 3.5%, representing the additional return on top of the risk free return available on the asset class.

The expected return on bonds has been taken as an average of the yield available on fixed interest gilts and high quality corporate bonds at the balance sheet date.

The expected return on ‘other’ has been taken as 3.0% pa, representing the long-term expected return on cash and short dated securities.

(c) Medical cost trend rateThe 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 a significant effect on the amounts recognised in the consolidated income statement. A one percentage point change in assumed medical cost trend rates would result in the following increase and decrease in the post retirement medical benefit obligation.

One % point

increase 2012

One % point

decrease 2012

One % point

increase 2011

One % point

decrease 2011

Effect on post retirement medical benefit obligation 2.0 (1.7) 2.5 (2.1)

Effect on the aggregate of current service cost and interest cost 0.1 (0.1) 0.1 (0.1)

(d) Mortality assumptionsThe Trustees of The Bupa Pension Scheme have undertaken a scheme specific mortality investigation as part of the 1 July 2011 triennial valuation.

The Trustees shared the conclusion drawn from this analysis with the Directors, who have adopted assumptions in line with this analysis for the purposes of the IAS 19 valuation as at 31 December 2012.

The mortality tables adopted at 31 December 2012 are the S1 SAPS year of birth mortality tables using the CMI projection model, with a long-term rate of improvement of 1.25% pa and an age rating of minus one year. The average life expectancies at age 60 based on these tables for a male currently aged 60 (45) is 27.8 years (29.3 years) and for a female currently aged 60 (45) is 30.3 years (31.9 years).

(vi) History of experience gains and losses2012

£m2011 £m

2010 £m

2009 £m

2008 £m

pension schemesPresent value of scheme obligations (1,203.1) (1,128.0) (953.9) (930.3) (718.6)Fair value of scheme assets 1,260.4 1,149.0 1,039.3 916.2 799.7Net surplus / (deficit) 57.3 21.0 85.4 (14.1) 81.1

Experience charge / (credit) arising on:Scheme obligations 2.9 62.7 (33.2) (9.6) (25.7)Scheme assets (45.7) (31.3) (41.2) (45.1) 115.5

post retirement medical benefit schemesPresent value of defined benefit obligations (14.9) (18.0) (20.8) (21.7) (17.0)

Experience credit arising on:Scheme obligations (0.4) (0.3) (0.3) (0.2) –


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.

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

Assets Liabilities net

2012 £m

2011£m

2012 £m

2011 £m

2012 £m

2011£m

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

Recognised deferred taxation 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 2012, the Group had deductible temporary differences relating to intangible assets of £28.4m (2011: £8.4m), trading losses of £69.3m (2011: £8.5m) and capital losses of £36.0m (2011: £31.7m) for which no deferred taxation asset was recognised due to uncertainty of utilisation of those temporary differences.


FINA

NC

IAL STA

TEM

EN

TS


Movement in net deferred taxation (liabilities) / assets

At beginning of year

£m

Recognised in income statement

£m

Recognised in other

comprehensive income

£m

Acquisitions through business

combinations £m

Disposal of subsidiary

companies £m

Foreign exchange

£m

At end of year

£m

2012Accelerated capital allowances (36.5) (29.7) – – – 1.0 (65.2)Post employment benefit asset / liability (4.5) (3.4) (1.0) – – – (8.9)Revaluation of properties to fair value (117.5) 31.0 9.1 – – 0.5 (76.9)Employee benefits (other than post employment) 24.6 (1.7) – – – (0.6) 22.3Provisions 3.8 7.4 – – – – 11.2Taxation value of losses carried forward 13.3 6.1 – – – (0.3) 19.1Goodwill and intangible assets (77.3) 10.3 – – – 1.9 (65.1)Other 19.4 (11.9) 0.2 0.5 – (0.4) 7.8Total (174.7) 8.1 8.3 0.5 – 2.1 (155.7)

2011Accelerated capital allowances (38.4) 3.2 – – – (1.3) (36.5)Post employment benefit asset / liability (17.4) 0.7 12.2 – – – (4.5)Revaluation of properties to fair value (133.2) 1.7 13.7 – – 0.3 (117.5)Employee benefits (other than post employment) 6.2 18.0 – – – 0.4 24.6Provisions 9.1 (5.2) – – – (0.1) 3.8Taxation value of losses carried forward 14.0 (7.7) 0.2 6.7 – 0.1 13.3Goodwill and intangible assets (98.3) 19.5 – – – 1.5 (77.3)Other 38.2 (19.4) – – 0.3 0.3 19.4Total (219.8) 10.8 26.1 6.7 0.3 1.2 (174.7)

4.0BuSInESS COMBInATIOnS AnD DISPOSALS

Business comBinations anD Disposals in BriefA business combination refers to the acquisition of all or part of a company’s shareholding and disposals refers to the sale of a subsidiary. This section describes how these transactions are presented within the consolidated financial statements.

(a) AcquisitionsBusiness combinations are accounted for using the acquisition method. Identifiable assets acquired and liabilities 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 excess of the cost of acquisition over the fair value of the Group’s share of the identifiable assets acquired is recorded as goodwill.

Costs related to the acquisition are expensed as incurred.

2012 acquisitionsA number of acquisitions were made during the year ended 31 December 2012, the details are as follows:

Spain Torrejón – hospital 50%

Australia Shalom – Care Services 100% vaucluse Gardens – Care Services 100%

new Zealand Abano – Care Services 100%

uK ultimate Spa Smile – Wellness 100% Capital Dent – Dental 100% GEM healthcare – home healthcare 100%

(i) TorrejónOn 5 December 2012, the Group acquired 50% of the share capital of Torrejón for cash consideration of £6.0m (€7.4m). The investment represents a 30 year Public-Private Partnership arrangement with the local government to operate the 250 bed hospital in Madrid. As a result, £0.1m of goodwill has been recognised. The fair value adjustments to the Torrejón acquisition balance sheet are provisional and will be finalised in 2013, no later than 12 months following the date of acquisition. The acquisition related costs included in operating expenses for the year ended 31 December 2012 were £0.2m (€0.3m). had Torrejón been consolidated from 1 January 2012, total revenue would have increased by £56.8m and profit after tax would have been reduced by £1.9m. Bupa has control over the financial and operating policies of Torrejón, so as to obtain benefits from the activities of the enterprise, therefore the results have been consolidated within the Group accounts.

(ii) OtherIncluded within other are the acquisitions of two Care home businesses in Australia, acquired for total cash consideration of £12.2m (Au$18.6m), Shalom and vaucluse Gardens. A valuation carried out by Knight Frank resulted in a fair value adjustment to the value of freehold properties acquired of £2.6m. As this valuation was not reflected in the negotiated purchase price, this resulted in a £2.6m gain on bargain purchase that has been recognised in the income statement in 2012.


Torrejón Other

Carrying value at

acquisition £m

Fair value adjustments

£mFair value

£m

Carrying value at

acquisition £m

Fair value adjustments

£mFair value

£m

Intangibles – – – 4.1 – 4.1Property, plant and equipment – – – 30.1 2.6 32.7Trade and other receivables 101.3 – 101.3 0.5 – 0.5Inventories 1.3 – 1.3 – – –Cash and cash equivalents 4.9 – 4.9 0.2 – 0.2Deferred tax 0.5 – 0.5 – – –Other interest bearing liabilities (0.2) – (0.2) – – –Trade and other payables (63.2) – (63.2) (21.6) – (21.6)Subordinated liabilities (32.9) – (32.9) – – –Provisions for liabilities and charges – – – (0.8) – (0.8)

11.7 – 11.7 12.5 2.6 15.1

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

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

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

In 2012, the Group acquired the remaining 40% non-controlling interest in Especializada y Primaria L’horta-Manises SA for cash consideration of £5.3m (EuR 6.5m). This resulted in a net gain of £5.3m recognised in other comprehensive income.

2011 acquisitionsOn 1 June 2011, the Group acquired 100% of the share capital of Centro Internacional de Medicina Avazada (CIMA) for cash consideration of £11.8m (€13.7m).

(b) DisposalsAt the date when the Group ceases to have control in an entity it is remeasured to its fair value, and the change in carrying value recognised in the income statement. Any amounts relating to the entity that have previously been recognised in the statement of other comprehensive income are reclassified to the income statement.

There were no disposals of businesses during the year ended 31 December 2012.

On 31 January 2011, the Group sold its 100% shareholding in Bupa health Assurance Limited, for cash proceeds of £168.2m. This business had been held for sale at 31 December 2010.

net assets divested were £166.9m, which included £179.1m in relation to financial investments, £177.0m of assets arising from insurance business and £157.1m of provisions under insurance contracts issued. A net gain on sale of business of £0.3m was included within other income and charges.

The 2011 sale proceeds from the disposal of subsidiary company was satisfied by cash of £168.2m. The cash proceeds received, net of disposal costs paid to 31 December 2011 and bank overdraft disposed of, resulted in a cash inflow of £171.7m.

(c) Subsequent eventsOn 8 February 2013 Bupa acquired Innovative Care’s care services operations in Australia. This acquisition will add an additional 10 residential care services facilities to our existing portfolio.

A deposit of £2.5m (Au$4.0m) was paid in regards of the Innovative Care acquisition in December 2012.

An exercise to determine the fair value of the net assets, consideration and contingent liabilities is ongoing.


FINA

NC

IAL STA

TEM

EN

TS


4.1EquITy ACCOunTED InvESTMEnTS

equity accounteD investmentsEquity accounted investments comprise associated companies and joint ventures.

equity accounteD investmentsAssociated 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 control, over the financial and operating policies of 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.

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 or made payments on behalf of the equity accounted investment.

The consolidated financial statements include the Group’s share of the 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 £34.2m (2011: £43.3m).

All equity accounted investments are included on a coterminous basis.

The Group has recognised £nil losses relating to Bupa healthcare Asia in the year (2011: £0.1m) and cumulatively £0.5m (2011: £0.5m) and Joint Research in the year of £0.1m (2011: £nil) and cumulatively £0.1m (2011: £nil), as these investments have been fully impaired and the share of losses exceeds the interest in the associate in each case.

(i) AssociatesThe Group’s share of the assets, liabilities, revenue and profit as reported in the most recent accounts of the individual equity accounted associates, is as follows:

2012 £m

2011 £m

Assets 93.5 108.5Liabilities (57.5) (76.6)net assets 36.0 31.9

Revenues 107.6 115.4Profit before taxation expense 6.3 0.7

(ii) Joint venturesThe Group’s share of the assets, liabilities, revenue and expenses as reported in the most recent accounts of the individual joint ventures, is as follows:

2012 £m

2011 £m

non-current assets 7.6 6.2Current assets 0.9 0.6non-current liabilities – –Current liabilities (5.2) (3.4)net assets 3.3 3.4

Revenues 3.3 1.2Expenses (4.9) (5.9)

During 2012, a capital injection of £3.7m (2011: £5.1m) was made in Max Bupa health Insurance Company Limited to maintain the shareholding of 26.0%. 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’s principal equity accounted investments are:Business

activityShare of issued

share capitalPrincipally

operates inCountry of

incorporation

Bupa Arabia For Cooperative Insurance Company Associate Insurance 26.25% Saudi Arabia Saudi ArabiaForsikringsselskaber nes Data Centre A / S Associate Insurance 33.33% Denmark DenmarkIBC Asia healthcare Limited Associate healthcare 26.04% uS Cayman IslandsMAX Bupa health Insurance Company Limited Joint venture Insurance 26.00% India India


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, shares and variable yield securities.

All financial investments are initially recognised at fair value, which includes transaction costs for financial investments not classified at fair value through 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.

financial investmentsFinancial investments are analysed as follows:

Carrying value 2012

£m

Cost 2012

£m

Carrying value 2011 £m

Cost 2011 £m

non-currentDesignated at fair value through profit or loss

Debt securities – government bonds 11.8 11.8 7.1 7.9Debt securities – corporate bonds 109.9 98.2 56.5 75.0Shares and other variable yield securities 136.9 111.0 139.3 124.2

held to maturityMedium-term notes 200.8 200.0 200.9 200.0Debt securities – corporate bonds 1.7 1.7 – –

Loans and receivablesDebt securities – corporate bonds 75.9 39.9 72.2 39.9Deposits with credit institutions 549.1 541.8 185.5 184.9

Total non-current financial investments 1,086.1 1,004.4 661.5 631.9

currentDesignated at fair value through profit or loss

Debt securities – government bonds 10.9 10.9 8.4 8.3Debt securities – corporate bonds 1.5 1.5 26.5 26.4Shares and other variable yield securities 20.0 16.8 – –

held to maturityMedium-term notes – – 180.5 179.2Discounted notes 2.3 2.3 – –Debt securities – government bonds – – 0.5 0.5Debt securities – corporate bonds 53.7 53.2 – –

Loans and receivablesOther loans 9.3 9.3 – –Deposits with credit institutions 1,067.7 1,041.0 1,005.7 979.4

Total current financial investments 1,165.4 1,135.0 1,221.6 1,193.8

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


FINA

NC

IAL STA

TEM

EN

TS


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 similar to loans and receivables but where the Group has a positive intention and ability to hold investments 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.

Financial investments comprise:

Fair value 2012

£m

Cost 2012

£m

Fair value

2011 £m

Cost 2011 £m

Listed investments 255.8 225.7 201.5 187.3unlisted investments 378.9 330.8 490.4 474.1Deposits with credit institutions 1,616.8 1,582.9 1,191.2 1,164.3Total financial investments 2,251.5 2,139.4 1,883.1 1,825.7

fair value of financial instrumentsThe fair value of a financial instrument is defined as the amount at which a financial instrument could be exchanged in an arm’s length transaction between informed and willing parties. Fair values disclosed in the table above have been calculated as follows:

° debt securities, shares and other variable yield securities – quoted price if available or discounted expected future principal and interest cash flows;

° 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 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 instruments carried at fair value are measured using different valuation methods categorised into a three level hierarchy. The different levels have been defined by reference to the lowest level input that is 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 1 that are observable for the asset or liability, either directly (ie as prices) or indirectly (ie derived from prices); and

° Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

An analysis of financial instruments by valuation method is as follows:

Level 1 £m

Level 2 £m

Level 3 £m

Total £m

2012Financial investments

Debt securities – government bonds 22.5 0.2 – 22.7Debt securities – corporate bonds 18.9 92.5 – 111.4Shares and other variable yield securities 156.7 0.2 – 156.9

Derivatives*Derivative assets – 85.6 – 85.6Derivative liabilities – (8.2) – (8.2)

98

Level 1 £m

Level 2 £m

Level 3 £m

Total £m

2011Financial investments

Debt securities – government bonds 15.4 0.1 – 15.5Debt securities – corporate bonds 46.4 36.6 – 83.0Shares and other variable yield securities 139.1 0.2 – 139.3

Derivatives*Derivative assets – 81.7 – 81.7Derivative liabilities – (8.8) – (8.8)

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

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

2012 %

2011 %

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

5.1BORROWInGS

Borrowings in BriefThe Group has various sources of funding including subordinated bonds, senior unsecured bonds, debenture stock 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 guarantee bonds with a corresponding fair value hedge. The amortised cost of these borrowings is adjusted for the fair value of the risk being hedged.

2012 2011

Section/ note

Non-current

£mCurrent

£mTotal

£m

non-current

£mCurrent

£mTotal

£m

Callable subordinated perpetual guaranteed bonds 330.0 6.0 336.0 330.0 5.9 335.9Fair value adjustment in respect of hedged interest rate risk 5.4.2.2 84.0 – 84.0 76.7 – 76.7Callable subordinated perpetual guaranteed bonds at

carrying value (a) 414.0 6.0 420.0 406.7 5.9 412.6Other subordinated debt due 2022 (b) 33.3 – 33.3 – – –Other subordinated debt due 2024 (c) – – – 18.3 – 18.310.5% subordinated guaranteed bonds due 2018 3.9 – 3.9 3.9 – 3.9Total subordinated liabilities 451.2 6.0 457.2 428.9 5.9 434.8

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



FINA

NC

IAL STA

TEM

EN

TS

99

(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% per annum. 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 total fair value of the callable subordinated perpetual guaranteed bonds, net of accrued interest, is £420.0m (2011: £412.6m). The valuation adjustment is the change in value arising from interest rate risk which is matched by the fair value of swap contracts in place to hedge this risk.

(b) Other subordinated debt due 2022Subordinated debt of £33.3m (€41.0m) 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.

(c) Other subordinated debt due 2024Debt issued by Especializada y Primaria L’horta-Manises SA, with a maturity date of 7 May 2024, was repaid during 2012 as part of the acquisition of the remaining 40% of the Company. The interest accrued at EuRIBOR +2.5%.

other interest Bearing liaBilities

Other interest bearing liabilities consist of senior unsecured bonds, secured loans, debenture stock, 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.

2012 2011

note

Non-current

£mCurrent

£mTotal

£m

non-current

£mCurrent

£mTotal

£m

Senior unsecured bonds (a) 348.7 12.3 361.0 348.2 12.3 360.5Secured loans (b) 233.8 4.1 237.9 233.9 4.1 238.0Debenture stock (c) 51.1 2.1 53.2 53.2 1.9 55.1Bank loans (d) 31.1 0.3 31.4 31.1 5.5 36.6Bank overdrafts (d) – 2.4 2.4 – 0.1 0.1Finance lease liabilities (e) 2.6 0.2 2.8 3.0 0.4 3.4Total other interest bearing liabilities 667.3 21.4 688.7 669.4 24.3 693.7

The fair value of total other interest bearing liabilities is £803.3m (2011: £789.8m).

(a) 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.

(b) Secured loansThe secured loans balance of £237.9m (2011: £238.0m) 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 thereunder, 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 £529.4m (2011: £543.8m).

(c) Debenture stockThe 11.8% debenture stock of £53.2m (2011: £55.1m) is repayable at par in 2014. The stock is secured by a fixed charge over certain of the Group’s assets and a first floating charge over the businesses attached thereto and a general floating charge over certain assets.

The assets pledged as security include £72.2m (2011: £80.3m) of property, plant and equipment and £0.8m (2011: £0.4m) of inventories.

(d) Bank loans and bank overdraftsBank loans of £31.4m (2011: £36.6m) do not include any amounts which are guaranteed by 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.

(e) Finance lease liabilitiesFuture minimum payments under finance leases are as follows:

Future minimum

lease payments

2012 £m

Present value of

minimum lease

payments 2012

£m

Future minimum

lease payments

2011 £m

Present value of

minimum lease

payments 2011 £m

Payable within one year 0.3 0.2 0.4 0.3Payable after one year

but within five years 1.3 0.9 1.5 1.1Payable after five years 2.4 1.7 2.8 2.0Total gross payments 4.0 4.7Less: finance charges

included above (1.2) (1.3)Total payments net of

finance charges 2.8 2.8 3.4 3.4


100

5.2DERIvATIvES

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

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. Section 5.0 shows the instrument valuations under level 2 of the three level hierarchy.

Fair values are obtained from exchange quoted prices and, where specific exchange prices are not available, from market observable pricing information including interest rate yield curves. The fair values of futures and options are obtained from the quoted prices on the relevant exchange, including LIFFE. 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.

2012 £m

2011 £m

Derivative assetsnon-current* 84.0 76.7Current 1.6 5.0Total derivative assets 85.6 81.7

Derivative liabilities non-current (4.5) (5.0)Current (3.7) (3.8)Total derivative liabilities (8.2) (8.8)

Note* 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 its stakeholders while efficiently deploying capital to sustain ongoing business development.

The Group manages as capital the cumulative individual amount of the equity of all Group subsidiaries, exclusive of any non-controlling interests, and other inadmissible assets as discussed below. The Group has a £330.0m perpetual bond accounted for as debt in these financial statements. however, this is managed as though it were capital for regulatory purposes, as discussed below.

As a company limited by guarantee, Bupa has no shareholders or owners. All profits are therefore used to develop the Group’s businesses for the benefit of customers. Except for equity attributable to non-controlling interests, any equity in the Group is considered ‘equity attributable to Bupa’.

The Group’s capital management objective is to maintain sufficient capital to protect the interests of all of its customers, investors, regulators and trading partners while also efficiently deploying capital and managing risk to sustain ongoing business development.

The Group aims to operate within a targeted range for solvency, leverage and interest cover ratios designed to support an investment grade rating. The Bupa Group as a whole is not rated by any rating agency, although individual debt issues and various subsidiaries within the Group do have public ratings.

The uK’s Financial Services Authority (FSA) classifies the whole of the Group as an insurance group. As such, the Group must maintain regulatory capital resources in excess of a collective capital requirement, imposed by the FSA through its Prudential Sourcebook (PSB), for Bupa to comply with the Eu Insurance Groups Directive (IGD). When assessing the Group’s compliance with its capital requirement, the PSB requires that the Group values and credits towards its net asset position only those assets that meet certain

criteria on admissibility, concentration limits and counterparty exposure limits. Group companies that are regulated are subject to similar regulatory restrictions within the jurisdictions in which they operate. The Group and its regulated subsidiaries complied with all externally imposed capital requirements during the current and prior year. Although they are not insurance businesses, the Group can and does recognise the book value of its care provision businesses as capital resources.

It is the Board’s policy that the Group maintains capital resources significantly in excess of its capital requirements and furthermore, that all regulated entities within the Group’s corporate structure meet any local minimum capital requirement imposed by local regulators at all times. The Group has a number of internal processes to ensure compliance with the Group’s capital requirements. These include requiring that significant future capital expenditure and growth initiatives be approved by the Board, either as stand alone projects or as part of the budgeting and forecasting exercises. The Group’s Treasury and Investment Committee must approve any change to financial investment strategy. Strategic developments and acquisitions affecting the Group’s capital require Board authorisation.

The Group Finance Department routinely reports to the Board the Group’s capital position, leverage and interest cover ratios as well as any constraints, risks or uncertainties about this position. The Group reports on any regulatory capital resources to local regulators and the FSA each year end.

In addition, the calculation of the return on capital employed is regularly reported to the Board.



FINA

NC

IAL STA

TEM

EN

TS

101

The Group has in place internal debt and investment management arrangements that allow the assets supporting technical liabilities or any solvency capital to be efficiently managed in a centralised manner. The Group’s Treasury Department also maintains large external credit lines with several leading banks to ensure the liquidity of the Group as needed.

There have been no changes to the Group’s capital management objectives, policies or procedures during the year.

5.4RISK MAnAGEMEnT

risk management in BriefThe Board is responsible for identifying, evaluating and managing risks faced by the Group 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.

Bupa operates the three lines of defence model.

1. Business management is responsible for the identification and assessment of risks and controls.

2. Risk functions together with risk policy owners 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 principal significant risks of the Group and how they are mitigated are described on pages 101 to 109.

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, pricing and claims riskUnderwriting riskunderwriting risk refers to the potential deviation from the actuarial assumptions used for setting insurance premium rates which in extreme scenarios 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.

Pricing riskPricing risk relates to the setting of adequate premium rates taking into consideration the volume and insurance characteristics of the policies issued. External influences to pricing risk include (but not limited to) competitor pricing initiatives and regulatory environments. The level of influence from these external factors can vary significantly between regions and largely depend on the maturity of health insurance 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 style is of an annually renewable health insurance contract. This permits tariff insurance premium rate revisions to respond reasonably quickly to changes in customer risk profiles and claims experience.

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.

Claims riskClaims risk is 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 conditions and practice.

Future adverse claims experience, for example, caused by external factors such as medical inflation, will affect cash flows after the date of the financial statements. Recent adverse claims risks are reflected in these financial statements in claims paid and in the movement in 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 necessarily underpinned by prevailing rates of illness. Additionally, claims risk is generally mitigated by the insurers running control processes to ensure that both the treatments and the consequent reimbursements are appropriate.


102

(ii) Reserving riskReserving risk is the risk that provisions made for claims prove to be insufficient in light of later events or information. Reserving risk is not significant to the Group as a result of the shortness of claims development patterns, coupled with the efficacy of the processes used to derive the assumptions used in setting provisions. The short-tail 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 not material. Also, of the small provisions that do relate to longer than one year, it is possible to predict with reasonable confidence the outstanding amounts. Comparisons of actual claims against previous estimates are therefore not provided.

(iii) 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 business.

none of the Group’s general insurance contracts contain embedded derivatives so the contracts do not in that respect 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 concentrations of insurance risk for the following reasons:

° broad geographical diversity across several markets – uK, Spain, Australia, Latin America, the Middle East, and hong Kong;

° 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 very well diversified. Only in selected circumstances does the Group use reinsurance. The reinsurance that is used does not give rise to a material counterparty default credit risk exposure to the Group.

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. Group Treasury is responsible for the management of the Group’s liquidity position and short-term borrowings, together with the risks arising on interest rates and foreign currencies and to protect the security of the Group’s financial assets.

In order to reduce the risk of assets being insufficient to meet future policyholder obligations, the Group seeks to match investments to liabilities. In addition, the Group actively manages assets using an approach that balances 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 absolute return assets (principally corporate bonds), the Group uses a value at risk analysis (vaR95) to quantify risk, taking account of asset volatility and correlation between asset classes. This portfolio was valued at £250.6m at 31 December 2012 (2011: £179.2m) and the 1 year vaR95 figure attributable to the portfolio is £22.7m at 31 December 2012 (2011: £19.2m).

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 maybe 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

2012 2011 2012 2011

Australian Dollar 1.5301 1.5545 1.5643 1.5157Euro 1.2335 1.1526 1.2308 1.1972new Zealand Dollar 1.9563 2.0289 1.9657 1.9912uS Dollar 1.5851 1.604 1.6242 1.5539

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



FINA

NC

IAL STA

TEM

EN

TS

103

Bupa has exposure to foreign exchange risk arising from its overseas operations. Key exposures are to the Australian Dollar, Euro, new Zealand Dollar, uS Dollar, hong Kong Dollar, Bahraini Dinar, Thai Baht, Mexican Peso and Singapore Dollar:

net currency exposure

£m

Currency forward

contracts £m

net currencyexposureincluding

hedges£m

2012Australian Dollar 2,151.3 (12.5) 2,138.8Euro 595.8 (133.1) 462.7new Zealand Dollar 246.8 (7.6) 239.2

uS Dollar 70.5 (157.3) (86.8)hong Kong Dollar 22.4 – 22.4Bahraini Dinar 12.8 – 12.8Thai Baht 11.7 – 11.7Mexican Peso 8.4 19.4 27.8Singapore Dollar 4.1 – 4.1Swiss Franc 0.1 (2.9) (2.8)Brazilian Real – 15.9 15.9Other 6.8 – 6.8Total foreign currency

denominated net assets 3,130.7 (278.1) 2,852.6

Percentage of Group net assets 65.0% 59.2%

2011Australian Dollar 2,165.3 (66.0) 2,099.3Euro 362.0 (186.2) 175.8new Zealand Dollar 209.5 – 209.5uS Dollar 111.6 (198.7) (87.1)hong Kong Dollar 19.0 – 19.0Bahraini Dinar 23.7 – 23.7Thai Baht 9.7 – 9.7Mexican Peso 4.3 16.3 20.6Singapore Dollar 4.6 – 4.6Swiss Franc 2.4 (8.2) (5.8)Brazilian Real – 14.4 14.4Other 1.4 – 1.4Total foreign currency

denominated net assets 2,913.5 (428.4) 2,485.1

Percentage of Group net assets 65.6% 55.9%

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 and then it is presented in financial income or financial expense as appropriate.

non-monetary assets and liabilities, denominated in a foreign currency at historical cost are translated using the exchange rate at the date of the transaction; no exchange differences therefore arise. 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.


104

Notes to the fiNaNcial statemeNts continuedfor the year ended 31 December 2012

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

Strengthening 10% Weakening 10%

Gains / (losses) included in income

statement £m

Gains / (losses) included in equity

£m

Gains / (losses) included in income

statement £m

Gains / (losses) included in equity

£m

2012Australian Dollar (29.3) (194.4) 35.8 237.6Euro (8.7) (42.1) 10.7 51.4new Zealand Dollar (0.8) (21.7) 1.0 26.6uS Dollar (4.0) 7.9 4.8 (9.6)Other (1.5) (9.0) 1.8 11.0Total sensitivity (44.3) (259.3) 54.1 317.0

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

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 currency forward contracts hedge the Group’s currency exposure, which arises from holding uS Dollar and Euro denominated financial investments classed as shares and other variable yield securities and corporate bonds. These hedged items have resulted in an income statement gain of £0.6m (2011: £0.1m).

As at 31 December, the following currency forward contracts were in place to hedge the Group’s currency exposure and held in the following currencies:

Maturity, expiry or execution

date

Initial value of

contracts sold £m

notional value of

liabilities £m

Carrying value

£m

2012Euro (€34.5m) 10 January 2013 (28.1) (28.0) 0.1

uS Dollar (uS$93.3m) 10 January 2013 (57.3) (57.4) (0.1)

2011Euro (€36.2m) 16 January 2012 (30.4) (30.2) 0.2

uS Dollar (uS$79.0m) 17 January 2012 (51.1) (50.8) 0.3

(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 2012, foreign currency forward contracts were entered into hedge cash outflows for the anticipated acquisition of LuX MED in 2013 amounting to €274.4m (£222.9m) resulting in a cash flow hedge reserve loss of £2.2m.

In 2008, forward foreign exchange contracts were entered into to hedge cash outflows for the acquisition of MBF amounting to Au$2,001.1m (£915.2m), which led to a cash flow hedge reserve gain of £36.4m. In 2011, a total of £2.2m of the related cash flow hedge gain was recognised in the income statement.

At 31 December 2012, the cash flow hedge reserve amounts to £25.1m.


105

FINA

NC

IAL STA

TEM

EN

TS

effect of foreign exchange heDging transactionsThe impact of all external foreign currency hedging activity is set out below. The ineffective portion of all hedges recognised in the income statement was £nil (2011: £nil).

Gains / (losses) included in the income statement are:

Currency forward

contracts £m

External borrowing

£mTotal

£m

2012Euro 0.8 – 0.8uS Dollar 2.4 – 2.4Total 3.2 – 3.2

2011Euro 0.9 – 0.9uS Dollar (0.3) – (0.3)Total 0.6 – 0.6

Gains / (losses) included in other comprehensive income are:

Currency forward

contracts £m

External borrowing

£mTotal

£m

2012Australian Dollar 2.0 – 2.0Euro 1.1 – 1.1uS Dollar – – –Total 3.1 – 3.1

2011Australian Dollar 4.0 – 4.0Euro 2.0 2.0 4.0uS Dollar (0.2) – (0.2)Total 5.8 2.0 7.8

(c) Foreign currency hedging of net investmentThe 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 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 £2,151.3m (Au$3,365.2m) (2011: £2,165.3m (Au$3,281.9m)) arises from the net assets of Bupa Australia Pty Limited, Bupa Care Services Australia and their subsidiary companies. Foreign exchange gains and losses on the Australian Dollar intercompany loans that are permitted to be taken to other comprehensive income on consolidation, under IAS 21, total a gain of £1.8m (2011: £15.8m). At 31 December 2012, the Group held foreign currency forward contracts totalling £12.5m (Au$19.6m) (2011: £66.0m (Au$100.0m)) and collar options totalling £127.9m (Au$200.0m) (2011: £132.0m (Au$200.0m)) to hedge a portion of net assets, which have been designated as hedges under IAS 39. The collar options mature within one year (Au$100.0m) and two years (Au$100.0m) from balance sheet date. The forward contracts mature within one month from balance sheet date and are rolled forward on an ongoing basis.

Euro translation exposureEuro translation exposure of £595.8m (€733.3m) (2011: £362.0m (€433.4m)) arises from the net assets of Grupo Bupa Sanitas SL and its subsidiary companies. Foreign exchange gains and losses on the Euro intercompany loans that are permitted to be taken to other comprehensive income on consolidation, under IAS 21, total a gain of £7.9m (2011: gain of £10.2m). At 31 December, the Group held foreign currency forward contracts totalling £254.9m (€313.7m) (2011: £140.8m (€168.6m)) 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 month from balance sheet date and are rolled forward on an ongoing basis.


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 2012 was £1,873.2m (2011: £1,584.6m). 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 contractual and anticipated repayment profile of interest bearing financial liabilities is as follows:

variable£m

Fixed£m

Total£m

undrawn facility

£m

20122013 (8.5) (18.6) (27.1) (793.6)2014 (0.5) (52.6) (53.1) –2015 (0.8) (0.8) (1.6) –2016 (0.8) (351.1) (351.9) –2017 (1.5) (1.4) (2.9) –2018–2022 (468.7) (6.3) (475.0) –After 2022 (1.7) (232.6) (234.3) –Total (482.5) (663.4) (1,145.9) (793.6)

20112012 (5.5) (24.7) (30.2) (893.6)2013 0.5 (2.4) (1.9) –2014 (1.6) (51.6) (53.2) –2015 (1.9) (0.5) (2.4) –2016 (2.0) (348.7) (350.7) –2017–2021 (332.5) (83.0) (415.5) –After 2021 (41.9) (232.7) (274.6) –Total (384.9) (743.6) (1,128.5) (893.6)

variable loans are re-priced 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 (2011: 100 bps) in interest rates at the reporting date, on an annualised basis, would have increased / (decreased) equity and profit by £27.3m (2011: £26.0m). The impact of a fall of 100 bps (2011: 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.

(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. 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. As at 31 December 2012 the fair value movement in the bond attributable to the hedged risk amounted to £7.3m (2011: £35.9m).

The following derivative contracts were in place as at 31 December to hedge the Group’s interest rate exposure:

Maturity, expiry or

execution date

Initial value of contracts

sold £m

notional value of

assets £m

Carrying value

£m

2012Interest rate swaps –

fair value September 2020 330.0 330.0 84.0

2011Interest rate swaps –

fair value September 2020 330.0 330.0 76.7

(ii) Cash flow hedgesDuring 2009, interest rates swaps were designated to hedge the €40.3m (£35.7m) floating rate debt in Especializada y Primaria L’horta Manises. The swaps currently cover 70.4% of the floating rate loan principal balance outstanding at the balance sheet date. At 31 December 2012, the fair value of the interest rate swap liability was £4.6m (€5.7m) (2011: £3.9m (€4.7m)).



FINA

NC

IAL STA

TEM

EN

TS

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 assets due to counterparties failing to meet all or part of their contractual obligations. The Group manages its credit risk exposures under the guidance of the Treasury and Investment Committee.

Investment exposure with external counterparties is managed by ensuring there is a sufficient spread of investments and that all counterparties are rated at least AA– by two of the three key rating agencies used by the Group (unless specifically approved by the Treasury and Investment Committee).

The Group has no direct exposure to peripheral Eurozone sovereign debt, however, there may be small holdings within the Group’s portfolio of return seeking assets. The Group’s exposure to Eurozone bank deposits has been reduced over the course of 2012 as part of ongoing risk management.

The investment profile at 31 December is as follows:

2012 £m

2011 £m

Overseas government bonds 22.6 16.0Investment grade counterparties 3,445.1 3,016.4non-investment grade counterparties 92.2 79.1Total 3,559.9 3,111.5

Investment grade counterparties include restricted assets of £52.7m (2011: £45.3m). non-investment grade counterparties are those rated below BBB-, and mainly comprise corporate bonds, shares and other variable rate securities of £67.5m (2011: £58.7m), cash and cash equivalents of £15.4m (2011: £20.4m) and other loans of £9.3m (2011: £nil).

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

2012Debt securities 265.4 – – – – – 265.4Shares and other variable yield securities 156.9 – – – – – 156.9Medium-term notes 200.8 – – – – – 200.8Discounted notes 2.3 – – – – – 2.3Deposits with credit institutions 1,616.8 – – – – – 1,616.8Other loans 9.3 – – – – – 9.3Reinsurers’ share of insurance provisions 13.6 – – – – – 13.6Insurance debtorsa 716.0 54.6 28.7 3.6 3.1 (17.9) 788.1Investment receivables and accrued investment income 1.8 0.1 – 0.1 2.7 (1.7) 3.0Trade and other receivablesb 264.9 73.3 6.3 14.8 109.7 (8.1) 460.9Total financial and insurance assets 3,247.8 128.0 35.0 18.5 115.5 (27.7) 3,517.1

2011Debt securities 171.2 – – – – – 171.2Shares and other variable yield securities 139.3 – – – – – 139.3Medium-term notes 381.4 – – – – – 381.4Deposits with credit institutions 1,191.2 – – – – – 1,191.2Reinsurers’ share of insurance provisions 19.4 – – – – – 19.4Insurance debtorsa 646.3 101.7 9.4 7.7 2.8 (17.4) 750.5Investment receivables and accrued investment income 2.0 – – – 2.4 (1.6) 2.8Trade and other receivablesb 272.2 59.4 10.0 9.2 41.9 (10.3) 382.4Total financial and insurance assets 2,823.0 161.1 19.4 16.9 47.1 (29.3) 3,038.2

Notesa. Comprises insurance debtors, Medicare rebate and Risk Equalisation

Trust Fund recoveries detailed in Section 3.0.2.b. Comprises trade receivables, other receivables and service concession

receivables detailed in Section 3.0.1.

107

FINA

NC

IAL STA

TEM

EN

TS


108

The carrying amount of financial and insurance assets of £3,517.1m (2011: £3,038.2m) included on the Group balance sheet represents the maximum credit exposure. In aggregate across the Group, reinsurance credit risk is not material.

The movement in the allowance for impairment in respect of financial and insurance assets during the year was as follows:

2012 £m

2011 £m

At beginning of year 29.1 33.7Impairment loss recognised 11.5 15.1Additions through business combinations – 0.1Bad debt provision released in year (12.6) (19.5)Foreign exchange (0.3) (0.3)At end of year 27.7 29.1

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 £52.7m (2011: £45.3m) of cash held in restricted access deposits, £72.2m (2011: £80.3m) of property, plant and equipment (see section 3.2) and £0.8m (2011: £0.4m) of inventories (see section 3.0.5). The property, plant and equipment is subject to a first legal mortgage and inventories are subject to a first floating charge as security for debenture stock issued by the Group, repayment in 2014.

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 funding is via an £800m committed bank facility which was put in place in October 2012 and matures in October 2017. The facility was undrawn at 31 December 2012 with the exception of £6.4m of outstanding letters of credit for general business purposes.

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 2012 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 FSA 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.



FINA

NC

IAL STA

TEM

EN

TS

109

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 payablesa

£m Total

£m

20122013 (20.6) (68.9) (2,355.2) (16.8) (889.7) (3,351.2)2014 (20.6) (98.0) (1.9) – (10.5) (131.0)2015 (20.6) (43.5) – – (3.4) (67.5)2016 (20.6) (380.7) (0.1) – (0.7) (402.1)2017 (20.6) (18.5) – – (0.4) (39.5)2018–2022 (447.3) (101.9) (2.7) – (2.1) (554.0)After 2022 – (348.0) (20.1) – (1.5) (369.6)Total (550.3) (1,059.5) (2,380.0) (16.8) (908.3) (4,914.9)Carrying value in the balance sheet (457.2) (688.7) (2,380.0) (16.8) (908.3) (4,451.0)

2011 (restated)2012 (20.6) (72.1) (2,136.5) (13.7) (805.1) (3,048.0)2013 (20.6) (49.7) (2.2) – (9.4) (81.9)2014 (20.6) (98.1) – – (4.1) (122.8)2015 (20.6) (44.4) – – (0.7) (65.7)2016 (20.6) (379.4) – – (0.5) (400.5)2017–2021 (410.5) (83.3) – – (1.1) (494.9)After 2021 (31.5) (403.8) (23.5) – – (458.8)Total (545.0) (1,130.8) (2,162.2) (13.7) (820.9) (4,672.6)Carrying value in the balance sheet (434.8) (693.7) (2,162.2) (13.7) (820.9) (4,125.3)

Notesa. Comprises 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. The maturity profile of financial assets as at 31 December 2012 and 2011, which are available to fund the repayment of liabilities as they crystallise, is as follows:

Cash andcash

equivalents£m

Depositswith creditinstitutions

£m

Discount notes

£m

Overseasgovern-

mentbonds

£m

uKcorporate

bonds£m

Overseascorporate

bonds£m

Other loans

£m

Mediumterm

notes£m

Sharesand other

variableyield

securities£m

Total£m

20122013 1,255.7 1,067.6 2.3 10.9 – 55.3 9.3 – 20.0 2,421.12014 – 549.2 – 0.5 – 53.5 – 150.7 136.7 890.62015 – – – – – 42.5 – 50.1 – 92.62016 – – – – – 2.0 – – – 2.02017 – – – – – 2.2 – – – 2.22018–2022 – – – 11.2 – 11.3 – – – 22.5After 2022 – – – 0.1 75.9 – – – 0.2 76.2Total 1,255.7 1,616.8 2.3 22.7 75.9 166.8 9.3 200.8 156.9 3,507.2

20112012 1,183.1 1,005.8 – 0.5 – – – 180.5 – 2,369.92013 – 185.4 – 8.7 3.4 29.2 – – 139.0 365.72014 – – – – 1.9 36.6 – 150.7 – 189.22015 – – – – 0.3 – – 50.2 – 50.52016 – – – 0.1 1.6 – – – – 1.72017–2021 – – – 6.7 9.8 – – – 0.3 16.8After 2021 – – – – 72.2 0.2 – – – 72.4Total 1,183.1 1,191.2 – 16.0 89.2 66.0 – 381.4 139.3 3,066.2


110

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 business segments at the beginning of the period to 30 September 2012, the Managing Directors of the Group’s market units from 1 October 2012 to year end, the Group Finance Director, and the Managing Director of Group Development. no Director had any material interest in any contracts with Group companies at 31 December 2012 (2011: £nil) or at any time during the year. The remuneration of the Group’s Executive and non-Executive Directors is disclosed in pages 54 to 58.

The total remuneration of key management personnel not disclosed in the remuneration report is as follows:

2012 £m

2011 £m

Short-term employee benefits 5.9 3.6Long-term incentive plan 1.1 1.3Post employment benefits 3.1 1.7Total 10.1 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 £44.0m (2011: £39.4m) of cash deposits (see Section 3.0.4). The increase in the charge of £4.6m during 2012 mainly reflects the changes in market conditions (low gilt yields) as well as the increase in the value of the liabilities resulting from additional accrual of benefits during the year and market related changes in the underlying actuarial assumptions.

6.1COMMITMEnTS AnD COnTInGEnCIES

commitments anD contingencies in BriefA commitment is future expenditure that is committed to as at 31 December 2012. 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:

2012 £m

2011 £m

Less than one year 55.2 45.1Between one and five years 184.8 173.1More than five years 528.8 516.5Total operating leases 768.8 734.7

The Group leases a number of properties under operating leases. The leases typically run for a period of 25 years, with an option to renew the lease after that date. Lease payments are reviewed regularly 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 2013 and 2024. Sub-lease receipts of £1.0m (2011: £1.3m) are expected to be received during the next financial year. The Group has an unoccupied property provision of £6.8m (2011: £8.4m) in respect of these leases (see Section 3.5). See Section 3.3 where the Group leases out its investment properties as a lessor.

(ii) Capital commitmentsCapital expenditure for the Group contracted as at 31 December 2012 amounted to £31.8m (2011: £28.1m), of which £14.9m (2011: £17.6m) related to property, plant and equipment and £16.9m (2011: £10.5m) 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.



FINA

NC

IAL STA

TEM

EN

TS

111

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 balance sheet, statement of cash flows and statement of changes in equity. Sections 7.1 to 7.10 form the associated notes to the Company financial statements.

The Company accounting policies are aligned with those at the Group, described at Sections 2 to 6.

BALANCE SHEETas at 31 December 2012

Section2012

£m2011 £m

Non-current assetsIntangible assets 7.1 26.8 21.9Property, plant and equipment 7.2 29.7 29.2Investment in subsidiary companies 7.3 200.1 200.1Other receivables 7.6 0.2 0.2Post employment benefit net assets 7.4 104.5 67.8Deferred taxation assets 7.8 – 1.8

361.3 321.0

Current assetsTrade and other receivables 7.6 118.4 102.8Current taxation asset 0.2 –Cash and cash equivalents 4.5 1.0

123.1 103.8Total assets 484.4 424.8

Non-current liabilitiesPost employment benefit net liabilities 7.4 (52.3) (54.1)Provisions for liabilities and charges 7.5 (12.3) (13.3)Deferred taxation liabilities 7.8 (3.2) –Trade and other payables 7.6 (9.0) (219.6)

(76.8) (287.0)

Current liabilitiesProvisions for liabilities and charges 7.5 (4.5) (4.2)Current taxation liabilities – (1.0)Trade and other payables 7.6 (119.2) (115.7)

(123.7) (120.9)Total liabilities (200.5) (407.9) Net assets 283.9 16.9

EquityProperty revaluation reserve – 0.1Income and expenditure reserve 283.5 16.4Foreign exchange translation reserve 0.4 0.4Total equity 283.9 16.9

Approved by the Board of Directors and signed on its behalf on 11 March 2013 by

Lord Leitch Evelyn BourkeChairman Chief Financial OfficerSections 7.1 to 7.10 form part of these financial statements.


112

INCOME STATEMENT for the year ended 31 December 2012The profit for the financial year dealt with in the accounts of the Company, The British united Provident Association Limited (Bupa), is £249.2m (2011: £142.2m). 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 754 (2011: 724).

STATEMENT OF CASH FLOWSas at 31 December 2012

Section2012

£m2011 £m

Operating activitiesProfit before taxation expense 233.6 130.1

Adjustments for:net financial income and expenses 4.5 5.2

Depreciation, amortisation and impairment 14.8 11.8

Revaluations 0.5 –Other non-cash items 3.8 (5.8)

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

Cash flow from investing activitiesPurchase of intangible assets (33.7) (37.9)Proceeds from sale of intangible assets 20.8 26.3Purchase of property, plant and equipment (9.4) (18.5)Proceeds from sale of property, plant and equipment 1.6 1.9Interest received 1.3 1.5

Net cash used in investing activities (19.4) (26.7)

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

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

Sections 7.1 to 7.10 form part of these financial statements.

Bupa annual report 2012 COMPAny PRIMARy STATEMEnTS AnD ASSOCIATED nOTES


FINA

NC

IAL STA

TEM

EN

TS

113Bupa annual report 2012 COMPAny PRIMARy STATEMEnTS AnD ASSOCIATED nOTES

STATEMENT OF CHANGES IN EQUITYfor the year ended 31 December 2012

Section

Property revaluation

reserve £m

Income and expenditure

reserve £m

Foreign exchange

translation reserve

£m

Total equity

£m

2012At beginning of year 0.1 16.4 0.4 16.9Profit for the financial year – 249.2 – 249.2

Other comprehensive income / (expense) Actuarial gain on pension schemes 7.4 – 18.6 – 18.6unrealised gains or losses on property revaluation reserve (0.1) – – (0.1)Taxation expense and credit on income and expenses

recognised directly in other comprehensive income 7.8 – (0.7) – (0.7)Other comprehensive (expense) / income for the year, net of taxation (0.1) 17.9 – 17.8

Total comprehensive income for the year (0.1) 267.1 – 267.0At end of year – 283.5 0.4 283.9

2011At beginning of year 0.1 (58.4) 0.4 (57.9)Profit for the financial year – 142.2 – 142.2

Other comprehensive (expense) / income Actuarial loss on pension schemes 7.4 – (83.9) – (83.9)Taxation expense and credit on income and expenses

recognised directly in other comprehensive income 7.8 – 16.5 – 16.5Other comprehensive (expense) / income for the year, net of taxation – (67.4) – (67.4)

Total comprehensive income for the year – 74.8 – 74.8At end of year 0.1 16.4 0.4 16.9

Sections 7.1 to 7.10 form part of these financial statements.

114 Bupa annual report 2012 COMPAny PRIMARy STATEMEnTS AnD ASSOCIATED nOTES

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 2012

£m2011 £m

costAt beginning of year 71.8 61.9Additions 33.7 37.9Disposals (47.1) (27.5)Other – (0.5)At end of year 58.4 71.8

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

Net book value at end of year 26.8 21.9net book value at beginning of year 21.9 16.9


FINA

NC

IAL STA

TEM

EN

TS


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.

property, plant anD equipment2012 2011

Leasehold property

£mEquipment

£mTotal

£m

Leasehold property

£mEquipment

£mTotal

£m

cost or valuationAt beginning of year 18.5 35.3 53.8 8.9 41.0 49.9Additions 1.3 8.1 9.4 11.0 7.5 18.5Disposals (0.9) (4.1) (5.0) (1.4) (13.7) (15.1)Revaluations (0.6) – (0.6) – – –Other (0.1) 0.1 – – 0.5 0.5At end of year 18.2 39.4 57.6 18.5 35.3 53.8

Depreciation and impairment lossAt beginning of year 5.4 19.2 24.6 1.5 26.4 27.9Depreciation charge for year 1.5 5.3 6.8 1.1 4.1 5.2Disposals – (3.4) (3.4) (1.4) (11.8) (13.2)Impairments – – – – 0.1 0.1Other – (0.1) (0.1) 4.2 0.4 4.6At end of year 6.9 21.0 27.9 5.4 19.2 24.6

Net book value at end of year 11.3 18.4 29.7 13.1 16.1 29.2net book value at beginning of year 13.1 16.1 29.2 7.4 14.6 22.0

The net book value of finance leased property held by the Company at 31 December 2012 is £1.0m (2011: £1.0m). The depreciation charge for the year ended 31 December 2012 is £nil (2011: £nil).


7.3InvESTMEnT 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 suBsiDiariesSubsidiaries are entities controlled by the Group. Investments 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 2012, the Company held investments in subsidiaries of £200.1m (2011: £200.1m).

The principal subsidiary companies of the Company as at 31 December 2012 are listed below and, except where stated, are incorporated in England and Wales. Subsidiary companies are 100% owned unless otherwise stated. Full details of all Group undertakings will be annexed to the Company’s next annual return in compliance with the Companies Act 2006.

health insurance – general business care and health provisionBupa Insurance Limited Bupa Care homes (CFG) PlcSanitas, SA de Seguros (99% holding) Spain Bupa Care homes Group LimitedBupa Australia Pty Limited Australia Bupa Care homes (Bnh) LimitedBupa Asia Pacific Pty Limited Australia Bupa Care Services LimitedBupa (Asia) Limited hong Kong Bupa Care homes (CFChomes) LimitedBupa Insurance Company uS Bupa Care homes (CFhCare) Limited

Bupa Care homes (GL) Limitedinvestment and financing activities Bupa Care homes (Partnerships) LimitedBupa Finance plc* Bupa home healthcare LimitedBupa Investments Limited Bupa Occupational health LimitedBupa Investments Overseas Limited Bupa Care Services Australasia Pty Limited AustraliaBupa Treasury Limited Bupa healthcare new Zealand Limited new ZealandGrupo Bupa Sanitas SL Spain Euroresidencias Sotogrande SL SpainuK Care no 1 Limited Guernsey Sanitas Residencial SL Spain

Sanitas, SA de hospitales SpainEspecializada y Primaria L’horta-Manises SA Spain

* Directly owned by the Company Torrejón Salud SA Spainhealth Dialog Services Corporation uSMedical Services International Limited

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


FINA

NC

IAL STA

TEM

EN

TS


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.

As noted in Section 1.6, IAS 19 Employee Benefits (Amendment) becomes effective for annual periods beginning on or after 1 January 2013. If the amendment had been adopted for the year ended 31 December 2012, the surplus for the Company would be increased by £1.5m.

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



note2012

£m2011 £m

2012 £m

2011 £m

2012 £m

2011 £m

Present value of funded obligations (ii) (1,076.2) (1,009.0) – – (1,076.2) (1,009.0)Fair value of scheme assets (iii) 1,180.7 1,076.8 – – 1,180.7 1,076.8net assets of funded schemes 104.5 67.8 – – 104.5 67.8Present value of unfunded obligations (ii) (37.4) (36.1) (14.9) (18.0) (52.3) (54.1)Net recognised assets / (liabilities) 67.1 31.7 (14.9) (18.0) 52.2 13.7

Represented on the balance sheet as:net assets 104.5 67.8net liabilities (52.3) (54.1)Net recognised assets 52.2 13.7

(ii) Present value of the scheme obligationsThe movement in the present value of schemes’ obligations is:



2012 £m

2011 £m

2012 £m

2011 £m

2012 £m

2011 £m

At beginning of year 1,045.1 879.3 18.0 20.8 1,063.1 900.1Current service cost 17.1 17.6 – – 17.1 17.6Interest on obligations 48.6 46.9 0.8 1.1 49.4 48.0Contributions by employees 0.1 0.1 – – 0.1 0.1Actuarial losses / (gains) 28.2 125.2 (3.4) (3.3) 24.8 121.9Benefits paid (25.5) (21.2) (0.5) (0.6) (26.0) (21.8)Gains on curtailment – (2.8) – – – (2.8)At end of year 1,113.6 1,045.1 14.9 18.0 1,128.5 1,063.1



(iii) fair value of funded scheme’s assets

The movement in the fair value of the funded scheme’s assets is:2012

£m2011 £m

At beginning of year 1,076.8 967.9Expected return on scheme assets 48.8 55.9Actuarial gains 42.0 36.6Contributions by employer 35.8 36.6Contributions by employees 0.1 0.1Benefits paid (22.8) (20.3)At end of year 1,180.7 1,076.8

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

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

2012 £m

2011 £m

Current service cost 17.1 17.6Interest on obligations 49.4 48.0Expected return on scheme assets (48.8) (55.9)Gains on curtailments – (2.8)Total amount charged to income statement 17.7 6.9 Actual return on scheme assets (90.8) (92.5)

(v) Amounts recognised directly in other comprehensive income

The amounts (credited) / charged directly to other comprehensive income are:

2012 £m

2011 £m

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

The cumulative amount of actuarial losses recognised directly in other comprehensive income is £169.7m (2011: £188.3m).

(vi) history of experience gains and losses2012

£m2011 £m

2010 £m

2009 £m

2008 £m

pension schemesPresent value of scheme obligations (1,113.6) (1,045.1) (879.3) (859.0) (663.0)Fair value of scheme assets 1,180.7 1,076.8 967.9 855.7 753.2Net surplus / (deficit) 67.1 31.7 88.6 (3.3) 90.2

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

post retirement medical benefit schemesPresent value of defined benefit obligations (14.9) (18.0) (20.8) (21.7) (17.0)

Experience credit arising on: Scheme obligations (0.4) (0.3) (0.3) (0.2) –

119

FINA

NC

IAL STA

TEM

EN

TS


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 beginning of year 15.5 1.5 0.5 17.5Charge for year 7.4 – 0.5 7.9Released in year – (0.4) (0.3) (0.7)utilised in year – cash (2.6) – (0.2) (2.8)utilised in year – non-cash (5.1) – – (5.1)At end of year 15.2 1.1 0.5 16.8

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

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 receivaBles2012

£m2011 £m

non-currentPrepayments 0.2 0.2Total non-current other receivables 0.2 0.2

currentAmounts owed by subsidiary companies 105.3 90.2Other receivables 1.6 2.1Prepayments 11.5 10.5Total current trade and other receivables 118.4 102.8

Total trade and other receivables 118.6 103.0

7.6.2 traDe anD other payaBles2012

£m2011 £m

non-currentAmounts owed to subsidiary companies 0.3 210.6Accruals 8.7 9.0Total non-current trade and other payables 9.0 219.6

currentAmounts owed to subsidiary companies 60.3 49.5Other payables 5.5 6.9Accruals 53.4 59.3Total current trade and other payables 119.2 115.7 Total trade and other payables 128.2 335.3



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 £6.1m (2011: £3.1m). The Company believes amounts owed to it by subsidiary companies carry no credit risk

Liquidity risk The contractual maturity of financial liabilities, held by the Company, fall due within one year

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

2012 £m

2011 £m

2012 £m

2011 £m

2012 £m

2011£m

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

Recognised deferred taxation assets Deferred taxation assets relating to the carry forward of employee benefits, other provisions, unused taxation losses and other deferred taxation assets are recognised to the extent that it is probable that future taxable profits will be available against which the deferred taxation assets can be utilised.

121

FINA

NC

IAL STA

TEM

EN

TS


Movement in net deferred taxation assets / (liabilities)

At beginning of year

£m

Recognised in income statement

£m

Recognised in other

comprehensive income

£m

At end of year

£m

2012Accelerated capital allowances 0.8 0.2 – 1.0Post employment benefit asset / liability (7.9) (3.4) (0.7) (12.0)Employee benefits (other than post employment) 3.7 (0.5) – 3.2Provisions 4.8 (0.4) – 4.4Other 0.4 (0.2) – 0.2Total 1.8 (4.3) (0.7) (3.2)

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

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 in this section enables readers to form a view about the impact of related party relationships on the Company.

The Company has a related party relationship with its key management personnel and with its subsidiary companies (see Section 7.3).

(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 companiesTransactions

during the yearBalance at

31 December

2012 £m

2011 £m

2012 £m

2011 £m

income statementManagement charges received 137.5 137.3Interest income 1.3 1.5Interest expense (5.9) (6.8)Income received 2.3 2.7Expenses paid (including rental expense of £4.9m (2011: £5.8m)) (5.5) (6.6)Dividends received 311.0 200.0

Balance sheetAmounts owed by subsidiary companies 15.1 (325.6) 105.3 90.2Amounts owed to subsidiary companies (10.8) 471.2 (60.3) (49.5)Loans to subsidiary companies – (50.4) – –Loans from subsidiary companies 210.3 22.0 (0.3) (210.6)

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.



7.10COMMITMEnTS AnD COnTInGEnCIES

commitments anD contingencies in BriefA commitment is future expenditure that is committed to as at 31 December 2012. These commitments primarily consists of contracted capital expenditure.

Contingent liabilities include bank loan and bond issue guarantees.

(i) CommitmentsCapital expenditure for the Company contracted as at 31 December 2012 but for which no provision has been made in the financial statements amounted to £nil (2011: £0.3m, all of which related to property, plant and equipment).

(ii) Operating leasesThe Company has £46.2m of operating lease obligations (2011: £nil).

(iii) Pensions contributionsThe Company has an obligation to make a series of special contributions to The Bupa Pension Scheme between 31 December 2012 and 31 December 2013, details of which are set out in Section 3.6. 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 liabilitiesGroup bank loans do not include any amounts (2011: £nil) that are guaranteed by the Company.

The Company has given a guarantee in respect of a £350.0m bond issued by Bupa Finance plc.

The Company is party to an £800m revolving credit facility, together with various other companies within the Group. The revolving credit facility was fully undrawn at 31 December 2012 with the exception of £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.

123

FINA

NC

IAL STA

TEM

EN

TS

Bupa annual report 2012 FIvE yEAR FInAnCIAL SuMMARy

8.0FIvE 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.

2012

£m

2011 (restated)

£m

2010 (restated)

£m

2009 (restated)

£m

2008 (restated)

£m

Revenues – segmental analysisAustralia and new Zealand Mu 3,554.0 3,252.8 2,804.0 2,236.8 1,507.3uK Mu 2,528.8 2,506.2 2,593.7 2,584.2 2,544.3Spain and Latin America Domestic Mu 1,190.8 1,212.6 1,151.4 1,125.8 933.4International Developing Markets Mu 227.3 244.2 262.0 271.5 342.0International PMI Mu 872.0 795.9 765.3 722.6 597.1net reclassifications to other expenses or financial income and expenses 0.9 4.4 (0.6) (0.1) (3.1)unallocated central revenues 0.1 2.0 0.2 0.6 2.9Consolidated total revenues 8,373.9 8,018.1 7,576.0 6,941.4 5,923.9

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

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

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

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

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

EquityProperty revaluation reserve 631.9 642.7 660.5 596.7 636.5Income and expenditure reserve 3,544.9 3,075.9 3,019.1 2,989.1 2,795.2Cash flow hedge reserve 25.1 29.0 30.7 29.7 30.9Foreign exchange translation reserve 590.1 662.7 656.1 333.6 124.9Equity attributable to Bupa 4,792.0 4,410.3 4,366.4 3,949.1 3,587.5Equity attributable to non-controlling interests 25.9 33.6 29.7 36.8 37.0Total equity 4,817.9 4,443.9 4,396.1 3,985.9 3,624.5

124


INTERNATIONAL FINANCIAL REPORTING STANDARDS RELEVANT TO BUPA

International Financial Reporting Standards (IFRSs)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 segments

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 19 Employee benefits 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 31 Interests in joint venturesIAS 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 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 customersSIC 12 Consolidation: Special purpose entitiesSIC 15 Operating leases – incentivesSIC 27 Evaluating the substance of transactions involving the legal

form of a leaseSIC 32 Intangible assets – website costs

Bupa annual report 2012 IFRSs RELEvAnT TO BuPA

This report has been printed on Vision Superior – an FSC® certified paper containing 100% ECF pulp and manufactured at a mill accredited with the ISo 14001 and EMAS environmental standards.

This report is printed by an FSC and ISo 14001 certified printer using vegetable oil-based inks and an alcohol free (0% IPA) process. The carbon footprint of this publication was calculated and carbon credits bought to offset and make this publication completely CarbonNeutral®. These carbon credits are invested in projects around the world that save equivalent amounts of Co2.

Designed and produced by Salterbaxter.

Printed by Pureprint. Pureprint are ISo 14001:2004, FSC certified and CarbonNeutral®.

Registered officeBupa House15–19 Bloomsbury WayLondon WC1A 2BA

For further copies of this document+44 (0)20 7656 2300

Press office+44 (0)20 7656 2454

bupa.com

The British United Provident Association Limited is a company limited by guarantee.

Registered in England No. 432511.

‘Bupa’ and the Heartbeat logo are registered service marks.

RA / 2012

BU

PA A

NN

UA

L RE

Po

RT

2012

Documents

ANNUAL REP oRT 20 12 LONGER, HEALTHIER, HAPPIER LIVES/media/files/site-specific-files/our-performan… · Geoff’s story 12 Gita’s story 14 Sue’s story 16 Financial review 18