BUPF.L Regulatory News (BUPF)

Bupa Finance plc (Bupa Finance)

HALF YEAR STATEMENT FOR THE SIX MONTHS TO 30 JUNE 2021

KEY POINTS

Performance review: "These results reflect Bupa's resilience and how well our teams have served our customers as our businesses navigate the pandemic. Although restrictions are generally being lifted around the world, we remain vigilant as the pandemic is not yet over."

Market performance (all at CER)

Financial position

Operational highlights

Enquiries

Media

Rupert Gowrley (Corporate Affairs): rupert.gowrley@bupa.com

Investors

Gareth Evans (Treasury): ir@bupa.com

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 and making a better world.

We are an international healthcare company serving over 31 million[5] customers worldwide. With no shareholders, we reinvest profits into providing more and better healthcare for the benefit of current and future customers.

We directly employ around 85,000 people, principally in the UK, Australia, Spain, Chile, Poland, New Zealand, Hong Kong SAR, Turkey, Brazil, Mexico, the US, Middle East and Ireland. We also have associate businesses in Saudi Arabia and India.

Disclaimer: Cautionary statement concerning forward-looking statements

This document may contain certain 'forward-looking statements'. Statements that are not historical facts, including statements about the beliefs and expectations of The British United Provident Association Limited (Bupa) and Bupa's directors or management, are forward-looking statements. In particular, but not exclusively, these may relate to Bupa's plans, current goals and expectations relating to future financial condition, performance and results.

By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend upon future circumstances that may or may not occur, many of which are beyond Bupa's control and all of which are solely based on Bupa's current beliefs and expectations about future events. These circumstances include, among others, global economic and business conditions, market-related risks such as fluctuations in interest rates and exchange rates, the policies and actions of governmental and regulatory authorities, the impact of competition, the timing, impact and other uncertainties of future mergers or combinations within relevant industries. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual future condition, results, performance or achievements of Bupa or its industry to be materially different to those expressed or implied by such forward-looking statements. Other than as required by law, Bupa expressly disclaims any obligations or undertakings to release publicly any updates or revisions to any forward-looking statements to reflect any change in the expectations of Bupa with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Forward-looking statements in this document are current only as of the date on which such statements are made.

Neither the content of Bupa's website nor the content of any other website accessible from hyperlinks on Bupa's website is incorporated into, or forms part of, this document.

Management review

COVID-19 remains a global challenge but there is more optimism now as vaccination programmes make progress in many countries, and our businesses adapt to the evolving rules and restrictions. Some of our markets have started to emerge from what we hope are the worst parts of the pandemic, although there are many issues still to navigate.

We are continuing to respond to the impacts of the pandemic and play our part in national responses, and we are constantly struck by the unceasing commitment and passion of Bupa's people. They have been amazing in how hard they have worked and how they are continuing to care for our customers and provide great service. We are very proud of all of them.

We have maintained our financial resilience through successive waves of the pandemic. Our Half Year 2021 results reflect the underlying strength of Bupa and improved trading conditions in many of our markets and across our business lines. Revenue was £6.5bn, up 9% year-on-year (2020: £5.9bn at CER), and underlying profit increased by 38% to £238m (2020: £172m at CER).

In health insurance, although revenue has grown, we have seen profits reduce year-on-year driven by a higher claims figure as the disruption to healthcare services seen in 2020 has reduced. Our health provision businesses are coming back strongly as they navigate successive lockdowns and evolving restrictions. Customer volumes in our dental businesses are improving well. We are seeing occupancy rates improving in our aged care businesses as some lockdown restrictions are eased. Protecting residents and staff remains our absolute focus and we are continuing to invest in safety equipment, staff training and support.

We are pleased with this set of first half results but we know we cannot stand still and will keep working hard through this year and beyond to keep navigating the challenges that arise from these uncertain times. Looking forward, we have undertaken a significant refresh of Bupa's strategy fundamentals which we believe will position us for success into the future.

Outlook

Although several of our markets have reached the advanced stages of vaccine deployment, it is clear COVID-19 will still impact economies and health systems for the foreseeable future. We're positive about our future prospects as restrictions, in general, continue to be lifted around the world, although we will remain vigilant as the challenges arising from the pandemic are not yet over.

Conditions in some markets remain challenging and there remains uncertainty to the timing and volume at which insurance claims will return. In Chile, our insurance business continues to be impacted by regulatory decisions, which reflect the political and social environment in the country. We are taking actions to strengthen this business. In aged care, trading conditions remain challenging, however with more residents being admitted, improved operating performance and some recent portfolio optimisation, this line of business should continue to move towards profitability.

We are well placed to navigate challenges and take opportunities because of our underlying financial strength, resilience and our diversified business model. We are focussed on embedding our new strategy and driving growth and transformation.

MARKET UNIT PERFORMANCE

Australia and New Zealand

Revenue increased by 6% to £2,549m at CER. Underlying profit increased to £144m, driven by increased customer volumes in Australian Health Services, lower operating costs in Australian Aged Care and improved margins in Australian Health Insurance. While COVID-19 restrictions generally eased in the first half of 2021, there were ongoing impacts across our businesses and we continued to prioritise the health and safety of our customers and employees through localised lockdowns.

In the Australian Health Insurance business, revenue grew year-on-year. Strong customer retention and favourable net downgrades contributed to improved performance. 2020 premium revenue was impacted by our decision to support customers through the COVID-19 financial hardship scheme, which included premium waivers, discounts and policy suspensions. Claims activity continued to be volatile in the first half of 2021 with ongoing uncertainty and localised lockdowns suppressing claims. Whilst this disruption was not as great as it was in H1 2020, net claims period to period were only marginally higher, given a deferred claims provision (DCP) was raised at H1 2020, which we continue to hold at 30 June 2021 (£180m). The combined operating ratio[7] (COR) for H1 2021 was 93%[8] (2020: 95%). We continue to invest to meet customers' evolving needs, including launching a new loyalty programme for longstanding customers.

Health Services in Australia delivered year-on-year revenue growth of 21% at CER driven by improved customer volumes across most businesses although government mandated lockdowns continued to impact our business. We launched Medical and Health Advisory Services for the Department of Veterans' Affairs (DVA) on 1 April. This network of health professionals provides clinical advice, communication and quality assurance activities to the DVA.

Although revenue in our Australian Aged Care business was stable year-on year, our operating loss reduced significantly. This was the result of implementing a number of business improvement initiatives, and included portfolio optimisation with five homes being sold or closed in the first half of 2021. We officially opened our first Australian retirement village, Bupa Sutherland, in March. Overall closing occupancy rate improved to 88% (HY 2020: 82%). The Royal Commission into Aged Care Quality and Safety published its final report in March 2021. We welcomed the Federal Government's response, which committed additional investment into the sector to support better care over the next five years. This represents an important first step in addressing overall sector challenges and we continue to work through the detailed implications.

In our New Zealand Aged Care business, revenue was flat and underlying profit declined as a result of higher operating costs. Retirement village sales increased by 70% as units across a number of new developments became available. Care home closing occupancy rate remained stable at 88% (HY 2020: 89%). The sale of seven rehabilitation sites and of one care home were completed. We officially opened our new Foxbridge Retirement Village and Care Home.

Europe and Latin America

Revenue grew by 14% and underlying profit declined by 4% at CER with portfolio growth seen in nearly all our insurance businesses, improved performance in our health provision business and efficiency initiatives in aged care. This was more than offset by a return to more normal claims performance as customers were better able to access private healthcare that was unavailable at times during H1 2020.

Our health insurance business in Spain, Sanitas Seguros, delivered solid revenue performance driven by sales, including a historic record of nearly 96,000 net new customers in H1 2021. Underlying profit declined by 43% at CER due to higher claims than in the previous year as lockdown measures were eased. The COR for the half year was 89%[9] (2020: 84%). We continued to enhance our digital offer with our new service, BluaU Smart, in which the customer actively participates in the product design choosing from a selection of innovative personalised cover options.

Our Dental business in Spain delivered good results. Revenue and underlying profit grew, driven by higher activity in our dental centres as we return to more normal operating levels after lockdowns. In March, our dental centres reached their highest level of new customers per working day and we continued to increase video consultation volumes.

In our Hospitals business in Spain, revenue and underlying profit grew year-on-year driven by increased customer visits as lockdowns eased. As part of our continued pandemic response, we launched the COVID-19 Medical Advisor: a service provided by medical professionals who support our customers and activate close contact tracing. To date, we have tested over 380,000 customers. We have also introduced Sanitas' Home Hospitalisation Unit, which offers continuous support to patients recovering in their homes.

In Sanitas Mayores, our aged care business in Spain, underlying profit improved year-on-year due to efficiency initiatives and some recovery in occupancy. We have launched a new campaign to attract new residents and we have included health insurance cover for all aged care customers. Closing occupancy rate was 80% (HY 2020: 78%), which has been progressively increasing during 2021.

In Chile, revenue grew mainly driven by good performance in our outpatient business, Integramedica and Clinica Bupa Santiago Hospital. Underlying profit, however, was down year-on-year, driven by higher claims in the Isapre insurance business with regulatory interventions, which included preventing premium adjustments and mandating extensions to cover, impacting the whole sector.

In Poland, LuxMed delivered good revenue growth, partly driven by growth in the corporate subscription business customer base of over 8% year-on-year. Underlying profit was stable year-on-year predominantly due to COVID-19 related costs offsetting revenue growth. We continued to enhance and expand telehealth and digital health services. As part of our response to the pandemic, St. Elisabeth Hospital in Warsaw continued to work with the public sector to care for COVID-19 patients.

In Turkey, our health insurance business Bupa Acıbadem Sigorta, delivered good revenue growth, while underlying profit decreased due to higher claims compared to 2020 as lockdowns eased.

Care Plus in Brazil delivered solid revenue and customer growth. Bupa Mexico delivered strong revenue growth, while underlying profit was stable. Bupa Global Latin America (BGLA) saw underlying performance improve steadily year-on-year.

Bupa Global and UK

We achieved good revenue growth of 9% at CER driven mainly by a strong increase in customer visits in the dental business, and the reduction in the impact of the UK return of premium provision compared to 2020.Underlying profit decreased by 36% at CER, mainly driven by higher claims in Bupa Global. This was partly offset by improved year-on-year performance in UK Dental and higher revenue in UK Insurance.

UK Insurance revenue was up and underlying profit increased due to improved product mix. Following the commitment made to pass back any exceptional financial benefit ultimately arising as a result of the temporary disruption to some medical treatments in 2020, we announced in March 2021 that eligible customers would receive a share of £125m. We are the first major health insurer to do this and payment has been made to around 290,000 customers to date. The final settlement is yet to be determined as we continue to see how claims rebound, and we retain a residual provision of £40m at 30 June 2021. We continue to expand our digital services. We are supporting 6,000 customers a week with Digital GP appointments, and 42% of our business customers now use our Bupa Connect portal.

In Bupa Global, our IPMI business, revenue was stable and underlying profit declined as claims levels increased, including a bounce back from the lower levels experienced in 2020. We have continued to see an increase in customers using our Global Virtual Care app which provides remote access to a global network of doctors. Over 68% of our customers now interact with us through our enhanced digital channels, and around half of claims are now done online.

The COR for Bupa Insurance Limited, the UK based insurance entity that underwrites both domestic and international insurance, deteriorated to 97%[10] (HY 2020: 94%) largely reflecting increased claims in Bupa Global.

UK Dental delivered improved performance with strong revenue growth year-on-year due to increased private customer visits. The business is welcoming an increasing number of NHS patients. The limitations imposed by COVID-19 safety measures are unlikely to be relaxed in the short term, thereby continuing to restrict the number of appointments and increasing costs.

Revenue in UK Care Services was flat year-on-year and underlying profit was stable as the sector continues to be supported by government infection control funding. There has been a steady increase in occupancy during 2021. The closing occupancy rate was up to 82% (HY 2020: 78%). In Richmond Villages, property sales increased to pre-pandemic levels.

In Health Services, revenue increased by 13% driven by increased customer activity in the clinics while underlying profit was stable year-on-year. We continue to develop our COVID-19 testing services. At the Cromwell Hospital, the "long COVID" clinic had increased demand and the hospital continues to work in partnership with NHS England to provide time-critical cancer and cardiac care for NHS patients.

Other businesses

Revenue in our other businesses was £232m up 5% at CER, driven by our Hong Kong SAR business with higher check-up and nursing services in health provision, as well as strong corporate client retention in insurance. Underlying profit in other businesses was down 16% to £27m at CER largely driven by higher COVID-19 related claims in our associate business in India, which is being rebranded to Niva Bupa.

FINANCIAL REVIEW

Overview

Revenue was £6.5bn, up 9% on the prior year (2020: £5.9bn[11] at CER), and underlying profit was £238m, up 38% (2020: £172m at CER). The Group's underlying results reflect the impacts of COVID-19 starting to subside in many markets, with health provision and aged care performance improving, partially offset by increased insurance claims levels following reduced disruption year-on-year.

Our statutory profit before taxation was £295m, up 54% (2020: £191m at AER), reflecting higher underlying profit, and gains made on acquisitions and divestments, including a one-off gain arising upon the transfer of customers from CS Healthcare into our UK Insurance business and divestment of the rehabilitation business in New Zealand.

Bupa generated cash from operating activities of £482m, down £448m on prior year (2020: £930m) reflecting the delay in claims outflows in the insurance businesses in 2020 partly offset by the return towards more normal trading levels across provision and insurance businesses.

The Group's Solvency II capital coverage ratio[12] of 163% at 30 June 2021 (FY 2020: 160%) sits comfortably within our target working range of 140-170% and reflects our ongoing financial resilience, despite the continued volatility caused by the pandemic.

Revenue (CER)

Revenue was up 9% as a result of portfolio growth, price rises in a majority of our insurance markets, and increased activity in our health provision businesses.

Revenue in insurance grew by 5%. Our insurance customers increased by 9% year-on-year, with growth coming in Europe and Latin America, particularly in our Spanish and Turkish businesses. Revenue was also buoyed by approved premium rises in Australia where an agreed change was postponed in 2020, and which are set in the context of medical inflation.

Our health provision businesses saw revenue growth of 34% reflecting higher customer numbers as the impacts of COVID-19 began to subside and health facilities were generally able to operate more normally.

In our aged care businesses, revenue was broadly in line with 2020 with overall occupancy rates 3 percentage points higher as restrictions began to ease and residents being able to be admitted to our homes. This was offset by some targeted disposals of homes as part of portfolio management.

Underlying profit (CER)

Group underlying profit increased by 38% to £238m (2020: £172m at CER). This reflects our businesses beginning to emerge from the pandemic, which has resulted in insurance profits reducing as claims levels return, and higher profits in health provision and aged care as a result of reduced lockdowns and government restrictions as well as lower COVID-19 related costs.

For our largest line of business, health insurance, despite revenue growth, underlying profit decreased due to a higher incurred claims number when compared to the particularly volatile claims experience during the first half of 2020. As lockdown measures began to be lifted across most of our markets, our customers began to access private healthcare facilities which they had not been able to at times during the prior year. During the first half of 2021, we have seen a trend of incurred claims returning towards more normalised levels, however the volume and timing of these varies market by market. Given the restriction on supply during the first half of last year, we held deferred claims reserves (30 June 2020: £389m) in many of our markets, however at H1 2021 we are only holding a reserve in Australia (£180m). Despite the reduction in such reserves, claims experience during the first half of 2021 drives a period-on-period reduction in underlying profit.

In the UK we had held a provision at the beginning of the year to satisfy our commitment to pass on any exceptional financial benefit ultimately arising from the pandemic to eligible UK PMI customers (FY 2020: £145m). In March 2021 we announced that eligible customers would receive a share of £125m. To date we have made cash payments to around 290,000 customers, the first major health insurer to do so. The final settlement is yet to be determined as we continue to monitor claims experience, and at 30 June 2021 we retain a residual provision of £40m.

We returned to profitability in our health provision businesses, as capacity restrictions in the majority of our markets reduced. This is in contrast to the prior year when there were a number of temporary closures due to localised government restrictions.

The underlying loss in aged care reduced significantly year-on-year, with revenue and customer levels broadly in line, but with lower costs, particularly on agency staffing and PPE, benefitting these results. Overall occupancy rates still remain below historical levels, as localised restrictions continue to arise intermittently. We have taken targeted actions to optimise our care home portfolio, and as restrictions continue to ease, we expect the aged care business to move back to profitability, although long-term structural challenges around government funding remain in some markets.

Central expenses and net interest margin of £28m were lower than prior year (2020: £45m at CER) as higher investment returns were partly offset by the additional interest costs associated with the debt issuances completed in June 2020.

Statutory profit

Statutory profit before taxation was £295m up 54% (2020: £191m), driven by both underlying and non-underlying results. The non-underlying items totaled £57m profit in 2021, compared with £13m profit in 2020.

The key drivers for non-underlying items in 2021 were property revaluation gains in our New Zealand retirement villages, gains made on the divestment of the rehabilitation business in New Zealand and a one-off gain on acquisition, arising upon the transfer of customers from CS Healthcare into our UK Insurance business (£39m).

Taxation

The Group's effective tax rate for the period was 25% (2020: 24%), which is higher than the current UK corporation tax rate of 19%. This is mainly due to profits arising in jurisdictions with a higher rate of corporate income tax than the UK. The revaluation of UK deferred tax balances following the change in enacted UK tax rate from 19% to 25% did not have a material impact on the effective tax rate for the period.

Cashflow

Net cash generated from operating activities decreased by £448m to £482m, reflecting the delay in claims outflows in the insurance businesses in 2020; partially offset by the return towards more normal trading levels and revenue growth across some provision and insurance businesses.

Net cash used in investing activities decreased by £324m to £199m in the first half of the year due to lower deposits than during the same period last year as a result of higher levels of claims being made.

Net cash used in financing activities has increased by £514m to £336m. This movement is driven by the Group issuing £300m senior and £350m Tier 2 bonds in June 2020, with the repayment of £350m senior bond in June 2021 primarily funded through partial drawdown of the Group's revolving credit facility (RCF).

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 for the Company, the main issuer of Bupa's debt.

The Company's senior debt ratings are A3 (negative) by Moody's and BBB+ (stable) by Fitch with no changes in the period.

The Company's Long-Term Issuer Default Rating (LT IDR) from Fitch is 'A-' and senior and Tier 2 bonds BBB+ and BBB- respectively. Bupa Insurance Limited's Insurer Financial Strength (IFS) rating and LT IDR are A+ (Strong) and A respectively. The outlook on both the Company's LT IDR and Bupa Insurance Limited's IFS ratings is stable. Moody's Bupa Insurance Limited Insurance Financial Strength Rating is A1 and the senior and subordinated debt ratings of the Company are A3 and Baa1 respectively, with a negative outlook.

A £350m senior bond was repaid on its maturity in June 2021 following the issuance of a £300m senior and a £350m Tier 2 bond in June 2020.

At 30 June 2021, our £800m RCF was drawn by £290m. The RCF matures in August 2022 and will be refinanced well in advance of its expiry. In the period, we also put in place a EUR30m bank facility in Spain to further support local and therefore Group liquidity. This remains fully undrawn.

We focus on managing our leverage in line with our credit rating targets. Leverage excluding operating leases at 30 June 2021 was 25.0% (FY 2020: 26.3%). Leverage is 32.1% (FY 2020: 33.6%) when IFRS 16 lease liabilities are taken into account.

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

Solvency[14]

The Group's solvency coverage ratio of 163% remains strong and comfortably within our target working range of 140-170%.

The Group 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. As at 30 June 2021, the estimated SCR of £2.5bn was the same as at 31 December 2020 and Own Funds of £4.1bn was £0.1bn higher when compared to 31 December 2020.

The Group surplus capital was estimated to be £1.6bn, compared to £1.5bn at 31 December 2020, representing a solvency coverage ratio of 163% (FY 2020: 160%). Our business continued to generate capital through our underlying profitability. This capital generation was largely offset by capital expenditure, debt financing costs and negative foreign exchange movements during the period as GBP appreciated against all major currencies.

The Group performs 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 14 percentage point reduction to the solvency coverage ratio.

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

As detailed in the Group's 2020 Annual Report and Accounts, Bupa includes a Group Specific Parameter ('GSP') in respect of the insurance risk parameter in the Standard Formula. The 2020 claims experience is not included in the GSP data set supporting the estimated HY 2021 SCR. It is the Group's judgement that the exceptional volatility experienced in 2020 claims as a result of COVID-19, is not representative of future premium risk. We are currently in discussions with the PRA to confirm how the impact of the pandemic will be taken into consideration in future reporting periods.

BUSINESS RISKS

We described our main risks in the Risk section of the Annual Report and Accounts 2020, which is available on Bupa.com. In the period to 30 June 2021 we are still seeing impacts from the COVID-19 pandemic which has resulted in significant uncertainty for society as a whole and for Bupa, but the principal risks and themes previously identified at the 2020 year-end also remain. Across Bupa we continue to take action to address ongoing operational risks and challenges in regards to the management of the pandemic. Governments continue to use varying levels of restrictions to control the infection rate. We are prepared for the operational impacts, including the potential closures of provision facilities, restrictions on resident visitation rights and changes in restrictions across our markets.

Strategic and financial risks and risks impacting our ability to deliver for our customers:

The macroeconomic environment is challenging in most markets, and this is compounded by COVID-19. It is uncertain how severe the impacts will be and how long they will last but any reduction in consumer or government spending may impact our businesses. Medical inflation continues to increase at a higher rate than income inflation and this is likely to be exacerbated by weakened economic environments. As a result, we are likely to see insurance premium increases at rates lower than medical inflation to maintain affordability of health insurance. This is particularly true in Australia, where the government continues to approve premium increases well below medical inflation.

Although claims costs have increased compared to last year as a result of some restrictions in place being lifted, disruptions still continue and the cost of claims could increase in the long run due to deferred costs of treating under-treated illnesses.

We have undertaken a range of stress and scenario analyses on our businesses to understand the potential impact of the pandemic on our business performance, solvency capital and liquidity position. This has helped us understand and mitigate the impact of the pandemic as far as possible and develop appropriate targeted actions to respond to these challenges. These tests have been designed to assess the impact on both 2021 and over the Group's three-year planning period.

Governmental and regulatory policy risks:

Changes in governmental and regulatory policy has consistently been one of our top risks given the nature of our businesses and this remains true. The significant governmental and regulatory responses to the pandemic has shown that future legislation, regulations and government funding decisions could have a material impact on the Group. We continue to engage both governments and regulators in the markets we operate in to understand and influence potential changes to ensure we are able to continue to deliver quality and value for our customers.

Operational Risks:

Information Security and Privacy remain key risks for the Group. Our focus on information security, technology and operational resilience in recent years, supported by significant investment to uplift capability and capacity in this area across the Group, has been critical in our response to this crisis. This investment has equipped us to effectively enhance digital and telehealth services and enabled our people to work remotely.

Following the pandemic, we are likely to see extensive and wide-ranging reviews into all aspects of the public and private response. These responses will often be judged in hindsight and this increases the risk of potential future litigation for all participants in the health care sector, including Bupa.

Social and environmental risks:

The pandemic has further demonstrated the importance of managing our reputation, with higher scrutiny on the actions of businesses in respect of customers, employees; and their contributions to society. It is more important now than ever that we continue to deliver on our purpose and serve and support our customers, our people and the communities we operate in.

Climate change remains one of the major risks we face as a society and is a key area of focus for us as Sustainability is a core Pillar of our new 3x6 strategy. We closely manage our environmental impacts and promote positive environmental practices. The Group's longer term exposure to climate change falls into two broad categories. Physical risks, particularly to the Group's property assets arising from severe weather events and the longer term health impacts, including possible increases in frequency of pandemics, as a result of the link between planetary and population health which may impact insurance claims and product design in the long term; and transition risks from the move to a low carbon economy, which will impact the value of those investments associated with higher levels of greenhouse gas emissions and affect the broader macroeconomic environment.

We have established a Group wide Environment and Climate Action programme, overseen by the Board Sustainability Committee, to consider and take appropriate action for Bupa. This programme includes considerations relating to our own carbon output, Risk Management processes and procedures, health implications from climate change and reporting and disclosure.

Our approach to risk management:

We have a well-established process for identifying and managing all business risks, including all types of operational risk such as information security and privacy. 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. The pandemic has reinforced that our Risk Management Framework remains appropriate for Bupa and has operated effectively, even during these extraordinary times. Internal controls, particularly regarding customer conduct and information security and privacy, continue to be key areas of focus.

BUPA AROUND THE WORLD

Australia and New Zealand

Europe and Latin America

Bupa Global and UK

Other businesses

We also have associate health insurance businesses in Saudi Arabia (Bupa Arabia) and India (Max Bupa, which is being rebranded to Niva Bupa), an interest in MyClinic in Saudi Arabia, a health insurance and provision business in Hong Kong SAR and a representative office and medical centre in mainland China.

Bupa Finance plc

(Company No. 2779134)

Condensed Consolidated Half Year Financial Statements (unaudited)

Six months ended 30 June 2021

Bupa Finance plc

Condensed Consolidated Income Statement (unaudited)

for six months ended 30 June 2021

Bupa Finance plc

Condensed Consolidated Statement of Comprehensive Income (unaudited)

for six months ended 30 June 2021

Bupa Finance plc

Condensed Consolidated Statement of Financial Position (unaudited)

as at 30 June 2021

Bupa Finance plc

Condensed Consolidated Statement of Cash Flows (unaudited)

for six months ended 30 June 2021

Bupa Finance plc

Condensed Consolidated Statement of Changes in Equity (unaudited)

for six months ended 30 June 2021

Notes 1-19 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 2021

1 Financial information and basis of preparation

1.1 Basis of preparation

Bupa Finance plc (the 'Company'), a company incorporated in England and Wales, together with its subsidiaries (collectively the 'Group') is an international healthcare business, providing health insurance, treatment in clinics, dental centres and hospitals, and operating care homes. The immediate and ultimate parent of the Company is The British United Provident Association Limited (the 'Parent' or 'Bupa' and together with its subsidiaries, the 'Bupa Group').

The Condensed Consolidated Half Year Financial Statements of the Company as at and for the six months ended 30 June 2021 comprise those of the Company and its subsidiary companies.

The interim financial statements have been prepared in accordance with UK adopted International Accounting Standard 34 Interim Financial Reporting and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority, and should be read in conjunction with the annual financial statements for the year ended 31 December 2020, which have been prepared in accordance with international accounting standards in conformity of the Companies Act 2006 and in accordance with International Financial Reporting Standards ('IFRS') adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. The Group's change, on 1 January 2021, from IFRS as adopted in the European Union, to UK adopted IFRS, was a change in accounting framework, in line with the requirements of UK company law, not a change in accounting policy. There was no impact on recognition, measurement or disclosure from this change in framework. The interim financial statements have been prepared on the basis of the accounting policies set out in the annual financial statements for the year ended 31 December 2020.

The interim financial statements were approved by the Board of Directors of Bupa Finance plc on 4 August 2021.

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 2020 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

Following a detailed assessment of the Group's going concern status based on its current position and forecast results, the Directors have concluded that the Group has adequate resources to operate for at least the next 12 months from the approval of these financial statements. This assessment considered forecast and reasonably possible adverse changes to the Group's regulatory solvency, liquidity, access to funding and trading profitability over the next 12 months.

The assessment identified the risks and uncertainties most likely to impact the Group and considered the impact to the Group's businesses under reasonably possible severe scenarios including more onerous COVID-19 outcomes and associated broader economic impacts. Under such scenarios, significant short-term reductions in profitability arise, however the Group would still remain within its risk appetites for regulatory solvency and liquidity. The Group has access to a £800m revolving credit facility ('RCF') in order to meet liquidity needs. The RCF was drawn down by £290m at 30 June 2021 (31 December 2020: undrawn, 30 June 2020: undrawn) in order to meet liquidity needs. Additional management actions would allow the downside impact to be further mitigated by reducing expenditure, obtaining additional funding or divesting investments or businesses. Therefore the Directors do not consider that the scenarios considered change the conclusion of the Group's going concern assessment.

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 2021 Results Announcement. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are also described in the Financial Review of the Half Year 2021 Results Announcement.

1.3 Accounting estimates and judgements

The 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.

Key areas of estimation as well as key areas of judgement, including areas that have been recognised as particularly sensitive to the impact of COVID-19, are set out below. Further detail on any judgements taken are included in the related notes.

1.3.1 Estimates

Goodwill and intangible assets

Goodwill and intangible assets are recognised on business combinations and are tested for impairment on an annual basis, or where there are indicators of impairment. The key assumptions within this process include the discount rate, terminal growth rate and the forecast cash flows; which are key sources of estimation uncertainty. At 30 June 2021, all CGUs and intangible assets with an indefinite useful life were reviewed for indicators of impairment. Whilst there were no indicators of impairment identified, goodwill impairment tests were performed for CGUs which had limited headroom at 31 December 2020. This resulted in no impairment. The outcome of goodwill impairment test reviews and sensitivities to reasonably possible changes in assumptions are included in Note 7.

Property valuations

The Group has a significant portfolio of care home, hospital and office properties. Significant assumptions for freehold properties include average occupancy and capitalisation rates, whereas for investment property key assumptions include discount and capital growth rates. Further details of the significant assumptions are included in Notes 8 and 9.

Provisions arising from insurance contracts

Estimates included in the provisions arising from insurance contracts include expected claims payments and expenses required to settle existing insurance contract obligations. The key assumptions used in the calculation of the outstanding claims provision include claims development, margin of prudence, claims costs inflation, medical trends and seasonality.

During the course of the COVID-19 pandemic government restrictions across many of our markets affected insurance customers' ability to access treatment in private healthcare facilities and make claims, particularly for elective procedures. A deferred claim provision is established on a best estimate basis (plus a risk margin) for these claims where regulatory or other public commitments give rise to a constructive obligation to fund the deferred medical service, even if the service were to postdate a customer's contract period. The key assumption is the estimated cost of deferred claims that are expected to rebound. Further details of the reserving approach are included in Note 17.

1.3.2 Judgements

Impact of COVID-19 on valuations

The Group has made a number of key judgements in assessing the longer-term impacts of COVID-19 on the business. This notably includes judgements on the timing and extent of the recovery of the provision and aged-care businesses over the medium term from the impacts of COVID-19 as part of the cash flow forecasts used in goodwill impairment testing. Further details are included in Note 7.

In addition, significant judgements have been made in forecasting the insurance claims that remain deferred at the reporting date following COVID-19 disruption, including the timing and amount of claims that are expected to rebound. These judgements are used in the calculation of the deferred claims provision in the Australian health insurance business, the return of premium provision in the UK PMI business and to perform liability adequacy testing to ensure that the unearned premium provisions held across the insurance businesses are sufficient to meet expected claims and administrative expenses. Further details are included in Note 17. 

1.4 Restatements

1.4.1 Refundable Accommodation Deposits ('RADs')

The Group receives interest-free RADs in respect of payments for aged care units in Bupa Villages and Aged Care - Australia. Revenue is recognised for the imputed interest on RADs, reflecting the Group's position as lessor. The Group has determined that the use of the Maximum Permissible Interest Rate ('MPIR') is most appropriate to determine the imputed revenue and interest amounts. The MPIR is a rate set by the Australian Government and is used to calculate the Daily Accommodation Payment to applicable residents. Previously the Group used the overnight funding rate to determine imputed revenue and interest.

The impact of this change in measurement is shown in the table below. Comparative periods have been restated for the change.

1.4.2 IFRS Interpretations Committee decision 'Multiple Tax Consequences of Recovering an Asset (IAS 12 Income Taxes)'

In April 2020, the IFRS Interpretations Committee ('IFRS IC') published its final agenda decision 'Multiple Tax Consequences of Recovering an Asset (IAS 12 Income Taxes)'. The agenda item considered how an entity accounts for deferred taxes on an asset that has two distinct taxation consequences over its life which cannot be offset (taxable economic benefits from use and capital gains on disposal or expiry). The IFRS IC concluded that in these circumstances an entity identifies separate temporary differences (and deferred taxes) that reflect the distinct and separate taxation consequences of recovering the asset's carrying amount.

Previously, the Group measured deferred taxes by considering the use and disposal of the asset as one simultaneous manner of recovering the carrying amount of the bed licences held in Bupa Villages and Aged Care - Australia. Taking into account the IFRS IC decision, the Group amended its policy to take into account the multiple consequences of recovery. This policy change has been implemented on a retrospective basis.

The change in accounting policy was implemented from 31 December 2020 and the impacts for the 30 June 2020 comparative reporting period and the beginning of the earliest period presented are shown below:

The movement of £2m in the above balances relates to foreign exchange differences. This has led to a restatement of 'Foreign exchange translation differences on goodwill' of £2m and 'Other foreign exchange translation differences' of £(2)m in both the Condensed Consolidated Statement of Comprehensive Income and Condensed Consolidated Statement of Changes in Equity for the period ended 30 June 2020.

1.5 New and amended accounting standards

1.5.1 New and amended standards adopted by the Group

A number of amended standards became applicable for the current reporting period. The Group did not have to change its accounting policies or make retrospective adjustments as a result of adopting these amended standards.

1.5.2 Impact of standards issued but not yet applied by the Group

IFRS 17 Insurance Contracts

IFRS 17 Insurance Contracts was issued in May 2017 as a replacement for IFRS 4 Insurance Contracts, with amendments to IFRS 17 issued in June 2020. The final standard will be effective for annual periods beginning on or after 1 January 2023.

IFRS 17 requires a current measurement model where estimates are remeasured each reporting period. Under the general measurement model, contracts are measured using the building blocks of discounted probability-weighted cash flows, an explicit risk adjustment, and a contractual service margin ('CSM') representing the unearned profit of the contract which is recognised as revenue over the coverage period. However, an optional, simplified premium allocation approach, similar in nature to the Group's existing measurement basis, is permitted for short-duration contracts.

The detailed application of IFRS 17 is currently being evaluated by the Group. It is expected that the simplified premium allocation approach option will be available for the majority of the Group's insurance contracts, so a significant change in the measurement basis is not anticipated. The presentation and disclosure requirements of IFRS 17 will, however, differ considerably compared to the current approach.

IFRS Interpretations Committee decision 'Configuration or Customisation Costs in a Cloud Computing Arrangement (IAS 38 Intangible Assets)'

In April 2021, the IFRS Interpretations Committee ('IFRS IC') published its final agenda decision 'Configuration or Customisation Costs in a Cloud Computing Arrangement (IAS 38 Intangible Assets)'. This agenda decision considered how an entity should account for configuration and customisation costs incurred in implementing a Software as a Service ('SaaS') arrangement. The IFRS IC concluded that such costs should be expensed unless the criteria for recognising a separate asset are met.

The impact of this agenda decision is currently being evaluated by the Group. This evaluation is expected to be completed, and any impact of the agenda decision recorded, during the second half of 2021.

1.6 Foreign exchange

The following significant exchange rates applied during the period:

1.7 Events occurring after the reporting period

On 4 August 2021, the Group completed the sale of its 70% stake in Ginemed, a provision business in Spain held for sale as at 30 June 2021. There was no material gain or loss on disposal from the 30 June 2021 carrying value.

2 Operating segments

The organisational structure of the Group is managed through three Market Units based on geographic locations and customers: Australia and New Zealand; Europe and Latin America; and Bupa Global and UK. Management monitors the operating results of the Market Units separately to assess performance and make decisions about the allocation of resources. Bupa Hong Kong, Bupa China and the Group's associate investments, Bupa Arabia and Max Bupa are reported within Other businesses. The segmental disclosures below are reported consistently with the way the business is managed and reported internally.

With effect from 1 July 2021, Bupa Hong Kong has been incorporated into the Australia and New Zealand Market Unit to form Bupa Asia Pacific. The 2021 Annual Report will reflect this reporting change and 2020 balances will be restated, where applicable.

A key performance measure of operating segments utilised by the Group is underlying profit. This alternative performance measure is more relevant as it distinguishes underlying profit from other constituents of the IFRS reported profit before taxation not directly related to the trading performance of the business.

Underlying profit

The following items are excluded from underlying profit:

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

3 Revenues

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