BUPF.L Regulatory News (BUPF)

Bupa Finance plc (Bupa Finance): Half year statement for the six months to 30 June 2019

RESULTS IN LINE WITH EXPECTATIONS

HIGHLIGHTS

Performance review

We delivered positive results in a number of our businesses across Spain, Poland and Hong Kong, and in Bupa Global. These were more than offset by: the challenges we are experiencing in our Australian health insurance and aged care businesses; our ongoing investment in information technology to enhance security and digitise customer experience; and the impact of implementing the new accounting standard, IFRS 16: Leases.

We have a strong financial position, enabling us to balance short-term profit delivery with long-term investment for sustainable growth. We are committed to growing sustainably, investing in the services we offer to our customers and tightly managing costs. We expect the operating environment to remain challenging in some of our markets in the near-term, especially in Australia and Chile. We are clear about the challenges we face and are confident that we have the right strategy to navigate them.

Market Unit performance (CER)

Other operational highlights

Financial position

Enquiries

Media

Rupert Gowrley, Mar Soro (Corporate Affairs): +44 (0) 20 3855 0473

Investors

Gareth Evans (Treasury): +44 (0) 20 3314 1708

(Bupa 10252 LV)

About Bupa Finance plc

Bupa Finance plc (the Company) is a company incorporated in England and Wales. The condensed consolidated half year financial statements comprise the financial results and position of the Company and its subsidiary companies (together referred to as the Group). The immediate and ultimate parent of the Company is The British United Provident Association Limited (the Parent), which is also the ultimate parent company of the Bupa Group (Bupa).

Bupa's purpose is helping people live longer, healthier, happier lives.

With no shareholders, our customers are our focus. We reinvest profits into providing more and better healthcare for the benefit of current and future customers.

Health insurance accounts for the major part of our business with 16.7m customers and contributes around 75% of revenue. We operate clinics, dental centres and hospitals in some markets, with around 15m customers. We care for around 22,300 residents in our UK, Australia, New Zealand and Spain aged care businesses.

We directly employ around 80,000 people, principally in the UK, Australia, Spain, Poland, Chile, New Zealand, Hong Kong, Turkey, the US, Brazil, the Middle East and Ireland. We also have associate businesses in Saudi Arabia and India.

For more information, visit www.bupa.com.

Disclaimer: Cautionary statement concerning forward-looking statements

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

Management review

Group performance in the first half of 2019 was in line with our expectations and as signalled in the full year 2018 results announcement. Revenue was up by 4% to £6.0bn and underlying profit of £242m, was down by 19% year-on-year, both at CER.

We delivered positive results in a number of our businesses across Spain, Poland and Hong Kong, and in Bupa Global. These were more than offset by the challenges we are experiencing in our Australian health insurance and aged care businesses; our ongoing investment in information technology to enhance security and digitise customer experience; and the impact of implementing the new accounting standard, IFRS 16: Leases. We have a strong financial position, enabling us to balance short-term profit delivery with long-term investment for sustainable growth.

In Australia, customers face affordability pressures as the cost of living rises and wage growth remains low. This has impacted the take-up of health insurance. The Government has continued to restrict premium increases to a level lower than claims inflation, and this is affecting results across the health insurance industry. We are taking steps to ensure we provide great value for money and quality for our customers. In aged care, we are addressing a number of compliance and service issues in our care home business in Australia, including making investments to drive improvements.  

Across the Group, we invested heavily in our businesses, particularly in information technology to enhance security, digitise customer experience and increase efficiency. This investment has an impact on our profitability in the short-term, but it is the right thing to do for our customers and for the Group's future sustainable growth. In Spain, digital propositions like Blua and Salud Conectada, enable us to carve out a distinctive market position as a leading player in healthcare. We are proud of the leadership we are taking in mental health in the UK, with the launch of new mental health cover within consumer health insurance policies.

We invested in complementary health provision services which support and reinforce our health insurance positions. We further expanded our presence in dental with practice acquisitions and new openings in Australia, the UK, Spain and Poland. On 1 July, we started providing healthcare cover to 85,000 Australian Army, Navy and Air Force personnel through our ADF contract.

In January, we entered the Turkish health insurance market. Bupa Acıbadem Sigorta, with over 550,000 customers, is an innovative and growing business and the first stage of the integration process is going well.

We made good progress across our corporate responsibility agenda, creating shared value for our customers, people and communities. We are contributing through the Bupa Foundations in Australia, Spain and the UK, and increasing the use of renewable energy. Our employee engagement score was 78%, with 6,000 more people giving feedback since our last survey launched in October 2018.

We recently announced a simplification of our organisation structure to accelerate organic growth, strengthen governance and increase efficiency. From the second half of the year onwards, the Group will be structured as three Market Units: Australia & New Zealand; Europe & Latin America; and Bupa Global & UK. We will report our full year 2019 results in accordance with this new structure.

Over the period, we appointed new members to the Bupa Executive Team. Mark Glenn joined us from Barclays in July as Chief Information Officer, where he held senior technology roles. We are delighted to have him on board to lead this strategic agenda. Dr Paula Franklin, Bupa Global & UK's Chief Medical and Risk Officer, takes on the leadership of the global medical function from 1 August, alongside her current responsibilities in the UK. Dr Paul Zollinger-Read CBE, who has been Bupa's Chief Medical Officer since 2012, stepped down on 31 July.

Outlook

We are committed to growing sustainably, investing in the services we offer to our customers and tightly managing costs. We expect the operating environment will remain challenging in some of our markets, especially in Australia and Chile. We are clear about the challenges we face and are confident that we have the right strategy to navigate them.

MARKET UNIT PERFORMANCE

Australia and New Zealand

In Australia and New Zealand, we operate in difficult market conditions. Revenue was down 1% and underlying profit decreased 41% on last year. These results were driven by the challenges impacting our Australian health insurance and aged care businesses.

In Australia, customers are facing affordability pressures, with wages growing slower than the cost of living. For this year, we have the lowest health insurance premium increase for our customers in 17 years, after the Government approved an average premium increase of 2.99%. This increase is lower than claims inflation and compares to an industry average of 3.25%. Net Promoter Scores and retention levels have significantly improved as a result of our focus on customer experience, effective communication on rate increases and industry reforms aimed at assisting customer understanding and affordability. Our customer transformation programme is helping to provide more personalised services and improved customer experience.

In Health Services, we performed in line with expectations, with lower revenue in Bupa Dental offset by good performance from Bupa Medical Clinics. Since winning the Australian Defence Force contract in January, we have worked to ensure a smooth transition with services commencing from 1 July.

Our Australian aged care business was materially impacted by lower occupancy and higher costs. We have a number of homes operating under regulatory sanction and we are working with the regulator to make improvements in order to enhance care and support for our residents and their families. In addition, we engaged with the Royal Commission into Aged Care Quality and Safety which is examining the whole aged care system in Australia.

A number of divestments in our New Zealand aged care business resulted in a more focused portfolio. The performance in our retained portfolio was stable year-on-year. We are investing in integrated care home villages with new developments in the pipeline.

Europe and Latin America

In Europe and Latin America, we delivered good revenue growth of 5% year-on-year, while underlying profit remained flat on last year. Excluding the impact of IFRS 16, underlying profit was up 7% on 2018.

In Spain, our health insurance business delivered steady performance, driven by successful bancassurance partnerships as well as the positive impact of Néctar Seguros which was acquired in 2018. Blua, our digital proposition, goes from strength to strength. In the first half of the year, 460,000 customers had access to video consultations, representing a 57% increase year-on-year, with more than 1,800 doctors across all specialties.

Sanitas Dental delivered strong performance driven by the increase in customer numbers with dental cover. We opened four new dental centres, as part of our dental expansion plan.

Sanitas Hospitales and New Services benefitted from the acquisition of Ginemed, an IVF and fertility service provider, acquired in December 2018. The integration of this business is going well. We made progress in digital innovation, with our programme Salud Conectada. This is a health ecosystem which uses wearables, Big Data and AI, allowing patients to be supported and monitored by our medical professionals remotely. In the first half of the year, over 1,000 patients used this service.

Sanitas Mayores, our aged care business in Spain, maintained an average occupancy rate of 95% in 2019. We opened a new care home in Vitoria and a day care centre in Barcelona.

In Poland, LUX MED delivered strong results, particularly in our corporate subscriptions and inpatient businesses. We opened eight health clinics and 11 dental centres.

Our business in Chile delivered good revenue growth, driven by our outpatient business and increased activity in the Clínica Bupa Santiago hospital. There is some uncertainty in the private health insurance sector with a delay in the approval of the triennial premium rate increase together with wider developments in the reform of the Isapres insurance system. We are monitoring the situation closely and engaging with the Government.

UK

In the UK, revenue was stable, while underlying profit was down 28% mainly due to our investment in information security, performance in our dental business and the impact of IFRS 16.

Our health insurance portfolio remained stable to 2018 at 2.2m customers. We launched a new mental health cover within our consumer policies. This builds on our Business Mental Health Advantage cover, which was included in corporate customers' policies last year.

We acquired 13 dental practices, growing our market position to a total of 483 centres. Underlying performance was impacted by sector-wide pressures due to a shortage of dentists. We are committed to becoming the dental employer of choice introducing pay increases for dental nurses and a comprehensive enhanced benefits package for dental employees.

In our aged care business, we drove quality improvements and now have eight care homes rated 'Outstanding' by the Care Quality Commission. We opened our eighth Richmond Village in Wood Norton.

In our clinics business, we launched Bupa Smart DNA offering personalised fitness and wellness insights. At the Bupa Cromwell Hospital, we opened our new children and young people's outpatient department.

International Markets

Revenue in International Markets grew by 17% and underlying profit was up 33% year-on-year.

In January, we acquired Acıbadem Sigorta, Turkey's second largest health insurer, and have started the integration of this business, which is progressing well. 

We continue to see progress in Bupa Global, as we focus on improving customer retention and Net Promoter Scores. Our authorised insurer in Ireland started operations in March to serve customers living in the EU (but outside the UK and Ireland). Care Plus in Brazil delivered good results.

Bupa Hong Kong focused on customer proposition and service capabilities. Our clinics business, which operates under the Quality HealthCare brand, performed well driven by an increase in corporate customers and a rise in walk-in patients. We are closely following the developments in the social and political situation.

Our associate business, Bupa Arabia, was reappointed as the health insurance provider for the Saudi Basic Industries Corporation (SABIC). Our results also benefitted from the increase in our stake, completed in August 2018.

Max India, our partner in our associate business, is selling its stake to True North, an Indian private equity group, subject to regulatory approval. We look forward to working with True North to grow Max Bupa.

FINANCIAL REVIEW

Overview

The Group's results were in line with expectations. The positive performance in a number of our businesses was more than offset by the challenges in our Australian insurance and aged care businesses, our ongoing investment commitment in information technology and the impact of the new accounting standard, IFRS 16, due to the significant number of leased properties in our provision and aged care businesses.

Revenue was £6.0bn, up 4% on prior year (£5.8bn at CER). IFRS profit decreased by 16% to £257m (2018: £306m AER), while underlying profit of £242m was down 19% (2018: £298m CER). Excluding the acquisition of Acıbadem Sigorta in January 2019, and the impact of IFRS 16, revenue grew 2% and underlying profit was down on prior year by 19% at CER.

We generated cash from operating activities of £506m, up £13m on prior year. Our Parent's estimated capital coverage ratio of 165% at 30 June 2019 remains strong and comfortably above risk appetite. 

Bupa Finance plc's senior debt rating remains unchanged since December 2018.

Revenue (CER)

We achieved revenue growth of 4% across the Group.

Revenue in our insurance businesses grew by 4% versus last year. Our Australian health insurance portfolio remained stable to 2018 with 4 million customers. Revenue was flat to last year due to the benefit of the annual premium rate increase and improvements in retention being offset by lower net new business.

Our Spanish health insurance business grew revenue by 3% through strong performance in the bank partnership channel and from the acquisition of Néctar Seguros, a book of around 34,000 customers, in October 2018. Our insurance business in the UK delivered stable growth compared to 2018. In International Markets, our health insurance businesses increased revenue by 18% driven by the addition of Bupa Acıbadem Sigorta in Turkey, and year-on-year revenue growth in Bupa Global and Bupa Hong Kong.

Our provision businesses grew revenue by 2% and customer numbers were up 4%, with year-on-year increases across the majority of our markets. We delivered strong growth in our corporate subscription business in Poland and in Bupa Chile's outpatient business, Integramédica, as well as Clínica Bupa Santiago hospital which opened in the second quarter of 2018.

In our aged care businesses, revenue was flat to 2018. In Australia, revenue fell by around 4% mainly reflecting the lower average occupancy rate of 89%, down 6 percentage points from last year (2018: 95%). Our Spanish aged care business, Sanitas Mayores, continues to perform well with the average number of residents up 3% on last year. The average occupancy rate remained strong at 95%. In the UK, revenue was up on the prior period with the average care home occupancy rate improving by 3 percentage points on last year to 86% (2018: 83%).

Underlying profit (CER)

As previously reported, the methodology for calculating underlying profit was refined at full year 2018 to provide a better representation of underlying performance while reducing the number of items excluded from underlying profit[7]. Comparators have been restated to reflect this updated methodology.

In line with expectations, Group underlying profit declined by 19% to £242m for the first six months of 2019 (2018: £298m at CER). On a like-for-like basis, when excluding the acquisition of Acıbadem Sigorta, 4%, and the impact of IFRS 16 (4%), underlying profit decreased on prior year by 19% at CER.

Health insurance, our largest line of business, contributed around 85% of underlying profit for reportable segments. Our health insurance business profit in Australia declined by around 25% on 2018, with the annual premium rate increase being at a lower level than claims inflation. Our Spanish insurance business grew by 3% on the prior year driven by the growth in the portfolio, while Bupa Chile declined on last year reflecting higher claims. Profits in UK Insurance were 5% lower than last year as the improvement in the loss ratio has been more than offset by our investment in information technology. International Markets increased insurance profits by 14% on 2018, reflecting the improvement of Bupa Global coupled with good claims performance. Our results also benefit from the additional 5% stake in Bupa Arabia, acquired in August 2018, bringing our holding to 39.25%.

The Parent's Combined Operating Ratio (COR) of 95% represents a slight deterioration on last year (2018: 94%)[8]. The Australian health insurance entity's COR deteriorated two percentage points to 95% (2018: 93%)[8] as a result of the commercial challenges described above. The COR of our Spanish health insurer, Sanitas Seguros, marginally improved to 90% (2018: 91%)[8]. Bupa Insurance Limited, our UK insurance entity, underwrites both domestic and international private medical insurance, covering the business written by both the UK and parts of Bupa Global. The COR is slightly worse at 95% (2018: 94%)[8] principally due to increased investment in information technology.

Underlying profit in our provision businesses fell by around 30% on last year. On a like-for-like basis, when excluding the impact of IFRS 16, underlying profit declined by around 15% on 2018 mainly driven by Australia and the UK. Our Europe and Latin America Market Unit delivered strong like-for-like growth, and our health services business in Hong Kong achieved good growth mainly from its outpatient business.

In our aged care businesses, underlying profit declined by around £25m compared to 2018. UK Care Services increased profit, while Sanitas Mayores was broadly stable year-on-year. In Australia, our profits fell significantly reflecting the decline in occupancy levels compared to last year. We are addressing a number of compliance and service issues in our Australian care homes and, as a result, operating expenses have increased. In addition, we incurred costs as part of our engagement with the Royal Commission into Aged Care Quality and Safety.

Central expenses and net interest margin were £17m lower than the prior year partly reflecting £18m of investment income generated in Bupa Acıbadem Sigorta.

IFRS profit (AER)

IFRS profit before taxation was £257m (2018: £306m) representing a decline of 16% at AER. This reflects the reduced trading profitability on prior year, with the nature of non-underlying items comparable to, but slightly higher than 2018.

In 2019, losses on disposals are due to additional costs relating to the sale of a number of UK care homes in 2018. This compares with a gain of £8m in 2018 relating to the disposal of Bupa Global's shareholding in Forsikringens Datacenter A/S.

There were property revaluation gains in 2019 of £8m in our New Zealand aged care business, which were slightly higher than last year (2018: £7m), while 2018 also included property write-downs in the UK of £7m.

In 2018, other Market Unit non-underlying items of £5m relate to the set up of our new Irish insurer in preparation for post-Brexit trading. The return-seeking asset portfolio showed gains in the period of £24m, a change of £28m on the £4m loss in 2018. Central Market Unit non-underlying items includes the provision for expected credit losses on Bupa Acıbadem Sigorta investments.

Taxation

The Group's effective tax rate for the period was 30% (2018: 24%), which is higher than the UK corporation tax rate of 19%. This is mainly due to profits arising in jurisdictions with a higher rate of corporate income tax and one-off items including the release of a deferred tax asset and the recognition of additional provisions in our Latin American markets.

Cashflow

Net cash generated from operating activities grew by £13m (3%) to £506m. On a like-for-like basis, when excluding the change in presentation arising from IFRS 16 (c.£75m)[9], and the payment following the one-off tax settlement with the Australian Tax Office (£86m) as disclosed in our 2018 full year announcement, net cash generated from operating activities was up £24m (5%). This is the result of favourable changes in working capital partly offset by the decrease in pre-tax profit.

Net cash used in investing activities increased by £33m to £306m in the first half of the year (2018: £273m). In January 2019, we completed the acquisition of Acıbadem Sigorta, and invested in growth and development including new build activity in New Zealand, a retirement village development in Australia and expansion of our dental businesses in the UK and Spain. In addition, there have been lower proceeds from sale of property and decreased purchases of financial investments compared to 2018.

Net cashflows generated from financing activities decreased to £74m, a change of £45m from last year. This reflects a draw down on our revolving credit facility to fund the acquisition of Acıbadem Sigorta and a dividend payment to the Group's parent partly offset by the IFRS 16 presentational change.

Funding 

We manage our funding prudently to ensure a strong platform for continued growth. A key element of our funding policy is to target an A-/A3 senior credit rating.

Our Bupa Finance plc senior debt ratings are unchanged at A3 (stable) by Moody's and A- (stable) by Fitch.

At 30 June 2019, we had drawn £295m under our £800m revolving credit facility, which is due to mature in August 2022. We focus on managing our leverage in line with our credit rating targets. Leverage excluding operating leases at 30 June 2019 was 25.5% (FY 2018: 24.7%). Leverage would be 33.3% when IFRS 16 lease liabilities are taken into account.

Coverage of financial covenants remains well within the levels required in our bank facilities.

Solvency

The Parent holds capital to cover its Solvency Capital Requirement (SCR), calculated on a Standard Formula Basis, considering all our risks, including those related to non-insurance businesses. The estimated SCR as at 30 June 2019 was £0.3bn higher compared to 31 December 2018 at £2.4bn and Own Funds were £4.0bn, £0.1bn higher than at 31 December 2018.

The Parent's surplus capital was estimated to be £1.6bn, compared to £1.8bn at 31 December 2018, representing a solvency coverage ratio of 165% (FY 2018: 191%).

The decrease in coverage ratio from 31 December 2018 is due to IFRS 16 becoming effective on 1 January 2019 and acquisitions in the period, including Acıbadem Sigorta, offset by capital generation.

While the application of IFRS 16 accounting change does not change our risk profile, it requires all our operating lease assets and liabilities to be capitalised on the IFRS and Solvency II balance sheet. The value of both lease assets and liabilities at 30 June 2019 on the Solvency II balance sheet is £1.0bn. The lease assets attract a property risk charge under the Solvency II Standard Formula. This, together with interest rate risk on the liability, has increased the SCR by £0.2bn.

Our business is strongly capital generative due to our profitability. This underlying capital generation has offset the reduction in surplus capital due to IFRS 16 and acquisitions. The Parent's solvency coverage ratio of 165% is comfortably within risk appetite.

We perform an analysis of the relative sensitivity of our estimated solvency coverage ratio to changes in market conditions and underwriting performance. Each sensitivity is an independent stress of a single risk and before any management actions. The selected sensitivities do not represent our expectations for future market and business conditions. A movement in values of properties that we own continues to be the most sensitive item, with a 10% decrease having a 13 percentage point reduction to the solvency coverage ratio.

The Parent's capital position is resilient in the face of the individual risks, illustrating the strength of our balance sheet.

Strengthening and streamlining the Group's structure

We recently announced a simplification of our organisation structure to enable organic growth, strengthen governance and increase efficiency. From the second half of the year onwards, the Group will be structured as three Market Units: Australia & New Zealand; Europe & Latin America; and Bupa Global & UK. For our full year Annual Report and Accounts 2019, we will report in accordance with this new structure and restate our 2018 results, where applicable.

Business risks

We described our main risks in the Risk section of the Annual Report and Accounts 2018. In the period to 30 June 2019, there were no significant changes to the nature of these risks.

As previously reported, we have a well-established process for identifying and managing all business risks.

Our business could be affected by changing economic, political and regulatory conditions in the markets in which we operate. This might include economic volatility and structural shifts, such as price restrictions, political changes, high medical inflation or minimum wage increases. There is also increasing regulatory focus across our sectors.

As set out above, the private health insurance and aged care sectors in Australia are facing significant challenges. In Chile, there is some uncertainty following the delay in the approval of the triennial premium price increase alongside wider developments in the government's reform of the Isapres system. We keep our strategy and processes under review to ensure they are flexible enough to deal with changing external conditions.

In order to ensure issues in one business or Market Unit do not spread and impact our brand trust in another, contagion risk remains prominent in our operational and reputational risk management agenda with a focus on resolving and learning from issues faced.

We are continuing to prepare for the operational, commercial and legal implications of an exit of the UK from the EU under different scenarios, including a situation where the UK leaves the EU with no transition period or with no trade deal in place. We are examining an extensive list of issues and working through steps to protect the Group's position in these areas.

Internal controls, particularly regarding customer conduct, information security and privacy are key areas of focus.

Monitoring and managing our risks is key to ensuring that we achieve our strategic objectives in the long term, meeting the evolving expectations of our customers, people, bondholders and regulators. We keep our focus on strengthening our risk management approach and capability, responding to growth in our business, ensuring we deliver the high standards expected now and in the future.

We continue to monitor the risks set out above. As we hold significant goodwill, intangibles and financial investments on our balance sheet, the crystallisation of these risks could lead to impairments being recognised in future reporting periods. Our annual assessment of impairment of such assets takes place in the second half of the year.

Bupa Finance plc

(Company No. 2779134)

Condensed consolidated half year financial statements (unaudited)

Six months ended 30 June 2019

Bupa Finance plc

Condensed Consolidated Income Statement (unaudited)

for six months ended 30 June 2019

Notes 1-17 form part of these Condensed Consolidated Financial Statements.

Bupa Finance plc

Condensed Consolidated Statement of Comprehensive Income (unaudited)

for six months ended 30 June 2019

Notes 1-17 form part of these Condensed Consolidated Financial Statements.

Bupa Finance plc

Condensed Consolidated Statement of Financial Position (unaudited)

as at 30 June 2019

Notes 1-17 form part of these Condensed Consolidated Financial Statements. 

Bupa Finance plc

Condensed Consolidated Statement of Cash Flows (unaudited)

for six months ended 30 June 2019

Notes 1-17 form part of these Condensed Consolidated Financial Statements.

Bupa Finance plc

Condensed Consolidated Statement of Changes in Equity (unaudited)

for six months ended 30 June 2019

Notes 1-17 form part of these Condensed Consolidated Financial Statements.

Bupa Finance plc

Notes to the Condensed Consolidated Financial Statements (unaudited)

for six months ended 30 June 2019

1 Financial information and basis of preparation 

1.1 Basis of preparation 

Bupa Finance plc (the Company) is a company incorporated in England and Wales.

The condensed consolidated half year financial statements of the Company as at and for the six months ended 30 June 2019 comprise those of the Company and its subsidiary companies (together referred to as the "Group").

The interim financial statements have been prepared in accordance with Disclosure Guidance and Transparency Rules of the Financial Conduct Authority and with International Accounting Standard ("IAS") 34 Interim Financial Reporting, as adopted by the European Union ("EU") and should be read in conjunction with the annual financial statements for the year ended 31 December 2018, which have been prepared in accordance with the International Financial Reporting Standards ("IFRS") as adopted by the EU.

The interim financial statements were approved by the Board of Directors of Bupa Finance plc on 31 July 2019.

The financial information contained in these interim results does not constitute statutory accounts of Bupa Finance plc within the meaning of Section 435 of the Companies Act 2006. The comparative figures for the financial year ended 31 December 2018 are not the Company's statutory accounts for the financial year. Those accounts have been reported on by the Company's auditor and delivered to the Registrar of Companies. The report of the auditor was (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

1.2 Going concern

Management has conducted a detailed assessment of the Group's going concern status based on its current position and forecast results. They have concluded that the Group has adequate resources to operate for the next twelve months. In making this assessment, management have considered the discussions with the relationship banks as well as forecasts which take account of reasonably possible changes in trading performance, solvency capital and recent 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 Half Year 2019 Results Announcement. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Financial Review of the Half Year 2019 Results Announcement

The Group's £800m committed bank facility, which matures in August 2022, was drawn down by £295m at 30 June 2019 (30 June 2018: £210m, 31 December 2018: £170m).

1.3 Changes in accounting policies

Except for the changes below, the Group has consistently applied the accounting policies to all periods presented in these condensed consolidated financial statements.

1.3.1 Leases - adjustments recognised on adoption of IFRS 16

The Group has adopted IFRS 16 Leases with a date of initial application of 1 January 2019. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and supersedes IAS 17 Leases, IFRIC 4 Determining Whether an Arrangement Contains a Lease, SIC 15 Operating Leases - Incentives, and SIC 27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease.

The IAS 17 distinction between operating and finance leases is removed under IFRS 16, with all lease rights and obligations now being recognised in the statement of financial position on a similar basis to finance leases under IAS 17. A lease liability is recognised for all leases, reflecting the present value of the lease payments discounted using the relevant individual lessee company's incremental borrowing rate. The lease liability is measured at amortised cost and settled over the life of the lease. A corresponding lease asset is also recognised and depreciated over the life of the lease.

For the majority of leases, the Group has applied IFRS 16 using the modified retrospective approach, where the right-of-use assets equal the lease liabilities on transition, adjusted by the amount of any prepayments, intangible assets and onerous lease provisions. For a small proportion of leases, the right-of-use asset has been determined as if IFRS 16 had been applied since the lease commencement date but discounted using the lessee's incremental borrowing rate at the date of initial application. There is no restatement of comparative information and the cumulative effect of initially applying IFRS 16 is recognised as an adjustment to the opening balance of retained earnings.

In applying IFRS 16 on transition, the Group has used the following practical expedients permitted by the standard:

·; The Group has elected not to reassess whether a contract is or contains a lease as defined in IFRS 16 at the date of initial application. For contracts entered into before the transition date, the Group relied on its assessment made when applying IAS 17 and IFRIC 4.

·; For the majority of leases, reliance has been placed on previous assessments of whether leases are onerous under IAS 37 Provisions, Contingent Liabilities and Contingent Assets. For leases where the right-of-use asset has been determined as if IFRS 16 had been applied since the lease commencement date, this expedient has not been taken.

·; Accounting for operating leases with a remaining lease term of less than 12 months as at 1 January 2019 as short-term leases.

·; The exclusion of initial direct costs for the measurement of the right-of-use asset at transition date.

For leases previously classified as finance leases, the Group has recognised the carrying amount of the finance lease asset and liability under IAS 17 as at 31 December 2018 as the carrying amount of the right-of-use asset and the lease liability under IFRS 16 at 1 January 2019. These leases are subsequently measured under IFRS 16 principles.

IFRS 16 has had no significant impact in cases where Group acts as a lessor.

The impact of the adoption of IFRS 16 is set out below:

In addition, £3m has been reclassified from the property revaluation reserve to the income and expenditure reserves as a result of reclassifying finance leased property assets to right-of-use assets on implementation of IFRS 16.

The following reconciliation to the opening balance for the lease liabilities as at 1 January 2019 is based upon the operating lease obligation as at 31 December 2018:

1Primarily related to extension options that are reasonably certain to be exercised

The weighted average lessee's incremental borrowing rate applicable to the lease liabilities on 1 January 2019 was 5.3%.

1.3.3 The Group's leasing activities and ongoing accounting treatment

The Group's leases primarily relate to properties. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. Property leases will often include extension and termination options, open market rent reviews, indexation uplifts or fixed uplifts.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the individual lessee company's incremental borrowing rate taking into account the duration of the lease.

Lease payments include fixed payments, variable lease payments that depend on an index or a rate, payments related to optional extension and termination periods if the Group is reasonably certain to exercise or not to exercise the option, respectively.

The lease liability is subsequently measured at amortised cost using the effective interest method, with the finance cost charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability. It is remeasured when there is a change in future lease payments arising from a change in index or rate, or if the Group changes its assessment of whether it will exercise an extension or termination option. The lease liability is recalculated using a revised discount rate if the lease term changes as a result of a modification or re-assessment of an extension or termination option.

The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to restore properties to their original condition, less any lease incentives received. The right-of-use asset, excluding restorations costs, is typically depreciated on a straight-line basis over the lease terms. In addition, the right-of-use asset may be adjusted for certain remeasurements of the lease liability, such as indexation and market rent review uplifts. Restoration costs included in the right-of-use asset are amortised over the same term as the corresponding provision, which may be longer than the IFRS 16 contractual lease term.

Following the adoption of IFRS 16, the Group has reviewed its estimates of restoration provisions. Consequently, the provision has been increased by £30m, of which £12m has been expensed in the current period and £18m adjusted to the right-of-use asset.

The Group has elected not to recognise the right-of-use assets and lease liabilities for short-term leases that have a term of 12 months or less or leases that are of low value (£4,000). Lease payments associated with these leases are expensed on a straight-line basis over the lease term.

1.3.2 2018 Transitional impacts

In 2018, the Group adopted IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers. Both standards were implemented retrospectively, with the cumulative effect of initially applying the standards recognised as an adjustment to the opening balance of retained earnings at the date of initial application of 1 January 2018. The impacts of this are set out below:

1.4 Foreign exchange

The following significant exchange rates applied during the period:

1.5 Events occurring after the reporting period 

The Group recently announced a simplification of the organisation structure. From the second half of the year onwards, the Group will be structured as three Market Units: Australia and New Zealand; Europe and Latin America; and Bupa Global and UK. The 2019 financial statements will be reported in line with this new structure and 2018 balances will be restated, where applicable.

2 Operating segments

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

The Group recently announced a simplification of the organisation structure. From the second half of the year onwards, the Group will be structured as three Market Units: Australia and New Zealand; Europe and Latin America; and Bupa Global and UK. The 2019 financial statements will be reported in line with this new structure and 2018 balances will be restated, where applicable.

A key performance measure of operating segments utilised by the Group is underlying profit. This measurement basis distinguishes underlying profit from other constituents of the IFRS reported profit before tax not directly related to the underlying trading performance of the business.

As reported in our 2018 financial statements, in response to the FRC guidance on Alternative Performance Measures, the definition of underlying profit has been refined with the objective of providing better transparency around the trading performance of the Group. The total underlying profit of the reportable segments for June 2018 has been restated. The key restatement item is the inclusion of amortisation of intangible assets arising on business combinations as part of underlying profit (June 2018: £34m). Other refinements have been made to the definition but are not material to the reportable segment or Group

The adjustments made to reported profit before tax are to exclude the following:

- Impairment of intangible assets and goodwill arising on business combinations - impairment reviews are performed at least annually. Goodwill impairments are considered to be one-off and not reflective of the ongoing trading performance of the business.

- Net gains/losses on disposal of businesses and transaction costs on business combinations - gains/losses on disposal of businesses that are material and one-off in nature to the reportable segment or Group are not considered part of the continuing business; transaction costs incurred that relate to material acquisitions or disposals are not considered as part of ongoing trading performance of the business.

- Net property revaluation gains/losses - short-term fluctuations which would distort underlying trading performance. Includes unrealised gains or losses on investment properties, deficit on revaluations and property impairment losses.

- Realised and unrealised foreign exchange gains/losses - short-term fluctuations outside of management control, which would distort underlying trading performance.

- Other Market Unit/Central non-underlying items - includes items that are considered material to the reportable segment or Group and are not reflective of ongoing trading performance.

- Gains/losses on return-seeking assets, net of hedging - fluctuations on investments that are not considered to be directly related to underlying trading performance.