BUPF.L Regulatory News (BUPF)

Bupa Finance plc: Half year statement for the six months to 30 June 2018

CUSTOMER FOCUS DELIVERS STABLE H1 PERFORMANCE IN KEY INSURANCE BUSINESSES DESPITE TOUGHER MARKET CONDITIONS

HIGHLIGHTS

Performance review

Group revenue was flat and underlying profit fell 11%, both at constant exchange rates (CER). This was mainly due to the sale of parts of our UK care home business in December 2017 and February 2018, and the divestment of Bupa Thailand in July 2017. Excluding these divestments, revenue rose by 4% and underlying profit was down 2% (CER). Overall, statutory profit increased by 9% at actual exchange rates (AER). Our core insurance businesses performed well despite tougher market conditions in Australia and the UK. Health insurance remains our largest business line and is responsible for the majority of our revenue and profit.

A volatile political and uncertain economic environment means that conditions in some of our main markets are likely to remain tough in 2018. In response, we will continue to invest to strengthen and broaden our market-leading positions, extending the services we provide to further improve the experience of our customers, who remain our absolute priority.

Market Unit performance2

Other operational highlights

Financial position

1 While revenues from our associate and joint venture businesses are excluded from our reported figures, customer numbers and the appropriate share of profit from these businesses are included in our reported numbers

2 All figures presented are at Constant Exchange Rates (CER) unless otherwise stated. We use CER to compare trading performance in a consistent manner to the prior year. We have therefore retranslated our 2017 results using 2018 Average Exchange Rates

3 To derive underlying profit, profit before taxation is adjusted for amortisation and impairment of intangible assets and goodwill arising on business combinations, net property revaluation gains or losses, realised and unrealised foreign exchange gains and losses, gains or losses on return-seeking assets, profits or losses on the sale of businesses and fixed assets, transaction costs on acquisitions and disposals, restructuring costs and other one-off items. Total Group underlying profit includes central expenses and net interest margin not allocated to Market Units

4 The 2018 Solvency II capital coverage ratio is an estimated value

Enquiries

Media

Helen Vaughan-Jones, Mar Soro (Corporate Affairs): +44 (0) 20 3855 0473 

Investors

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

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.

We serve 15.5m health insurance customers, provide healthcare to over 14.5m people in our clinics and hospitals and look after over 22,900 aged care residents.

We directly employ over 78,000 people, principally in the UK, Australia, Spain, Poland, Chile, New Zealand, Hong Kong, the USA, Brazil, the Middle East and Ireland. We also have associate businesses in Saudi Arabia and India.

Health insurance accounts for the majority our business. In some markets we also operate clinics, dental centres, hospitals, and care homes and villages.

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 revenue was flat and underlying profit fell 11%, both at constant exchange rates. This was mainly due to the sale of parts of our UK care home business in December 2017 and February 2018, and the divestment of Bupa Thailand in July 2017. Excluding these divestments, revenue rose by 4% and underlying profit was down 2% (CER). Overall, statutory profit increased by 9% at actual exchange rates (AER). Our core insurance businesses performed well despite tougher market conditions in Australia and the UK. Health insurance remains the largest business line for Bupa, with the majority of our revenue and profit coming from this part of the business.

Customers remain our priority, and we continue to use Net Promoter Score across the business to track how we are improving customer experience. We are responding to pressure on household budgets in Australia by introducing our lowest health insurance premium increase in more than a decade. In the UK, we have enhanced our propositions by adding mental health coverage for employees of corporate customers. As we continue to use technology to improve customer experience, we launched a UK partnership with digital healthcare provider Babylon that gives our corporate customers 24/7 access to virtual health services such as GP consultation. We also launched 'B Table' in the UK and 'Disruptive' in Spain; accelerator programmes that work with start-ups and small businesses to help us develop innovative ways of delivering high quality health and care services.

We are committed to protecting the privacy of our customers and employees. We continue to invest to ensure that the privacy and information security controls used across our businesses meet the needs of our customers, as well as responding to new regulatory requirements and the increasing external cybersecurity challenge.

Outlook

A volatile political and uncertain economic environment means that conditions in some of our main markets are likely to remain tough in 2018. In response, we remain focused on listening to our customers and our people to help us deliver an enhanced experience.

MARKET UNIT PERFORMANCE

Australia and New Zealand

Conditions in the Australian Private Medical Insurance (PMI) market remain challenging, with the economy and wages growing slower than medical expense inflation. This is affecting health insurance demand, especially among younger people.

Against this background, the performance of our Australia and New Zealand Market Unit showed marginal growth, with year-on-year revenue up 2% and profit up 2% (both at CER).

We responded to continued pressure on PMI affordability with our lowest annual health insurance premium increase in 16 years. We also made a number of changes with the aim of improving product transparency and reducing out-of-pocket costs for customers. However, a negative response to these changes contributed to higher than expected customer churn in Q2, and we are working to address this.

Our health insurance transformation programme continued with the introduction of our new Customer Relationship Management (CRM) system which will enable us to provide a more personalised service for customers.

We completed a strategic review of our Health Services business, focusing on dental and optical services to deliver the best possible customer experience and more efficient operating models. This will provide a strong foundation for future growth. We will open new clinics and stores later this year.

Our aged care businesses in Australia and New Zealand were affected by expected reductions in government care funding across both countries. Despite this, our aged care business in Australia achieved stable performance. Our average care home occupancy rate is 95%. In New Zealand, we completed the sale of Bupa NZ's Medical Alarms business to focus on care homes and retirement villages, our core business in that country. We also completed the sale of 12 care homes and four retirement villages because they no longer fit our long-term strategy. We are currently developing new villages. Occupancy in Bupa New Zealand is 91%, higher than the national average (88%).

Europe and Latin America

In Europe and Latin America, revenue rose 6% year-on-year. Although our businesses performed well, underlying profit was down 5%, mainly driven by reserve strengthening in Bupa Chile, over and above local requirements. Excluding the adjustment, profit was up 3%.

In Spain, where we operate as Sanitas, we are steadily growing our insurance membership due to successful partnerships with BBVA and Santa Lucia and our focus on customer retention. Our digital proposition, Blua, is proving popular and added 126,000 new customers in the first half of the year. In June, we reached an agreement to acquire another health insurance company Néctar Seguros de Salud (subject to regulatory approval).

Sanitas Dental delivered an improved performance thanks to an increase in customer numbers. In the first half of the year, we added 194,000 customers and announced a plan to expand our dental clinics from 181 to 250 in the next three years.

Our provision business benefited from the growing portfolio of customers in our Health Funding business, with over 552,000 patients treated in our hospital and medical clinics - a 31% increase on the same period last year.

Sanitas Mayores, our Spanish aged care business, is doing well. We launched our Sanitas En Casa Contigo (Sanitas At Home) service, which provides specialist services for the elderly and training for carers at home, supported by a strong digital platform. We launched a pilot in three Spanish cities and are looking to extend to more locations later in the year. On average, occupancy rate is 94%.

Our Polish business, LUX MED, delivered robust revenue growth, driven by an increase in corporate customers and growth in the market for customer self-pay products in our hospitals and clinics. We completed several acquisitions, including a chain of dental clinics in Warsaw and an image diagnostics centre in Olsztyn.

In Chile, we opened the first phase of Clínica Bupa Santiago - a £140m investment which, when complete, will have a capacity of 460 beds and will be the largest Bupa hospital.

UK

Due to the sale of parts of our UK care home business in December 2017 and February 2018, our revenue fell by 9% and underlying profit was down 25% year-on-year. Excluding these divestments, revenue was up 5% and underlying profit rose 8% (CER). These gains, which included six months of trading of Oasis Dental Care compared to four months in 2017, were achieved in an environment of low economic growth in which medical cost inflation continues to outstrip price inflation.

Our insurance business launched Business Mental Health Advantage, offering the most extensive mental health coverage in the market for employees of corporate customers.

Within our aged care business, we completed the sale of 22 care homes to Advinia and opened four new homes. Our Tenterden House care home became the second Bupa home to receive an 'Outstanding' rating from the Care Quality Commission. Our average occupancy rate is 83%.

We continue to strengthen our market position in dental care by acquiring practices - we have over 470 practices across the UK and Ireland. Most of the former Oasis Dental Care practices have been rebranded to Bupa Dental Care.

We are also investing in our health clinics, opening new centres at our Cromwell Hospital and in Glasgow, as well as a partnership clinic at the Kingsbridge private hospital in Belfast. We are trialling a partnership with Waitrose, offering shoppers a range of services such as in-store health assessments.

International Markets

Revenue in International Markets declined 2% year-on-year, with underlying profit down by £9.6m due to a continued profit decline in Bupa Global and the disposal of our business in Thailand, in July 2017. As anticipated, Bupa Global's results continue to be affected by the strategic repositioning we began in this business a number of years ago to focus on selected strategic markets. A number of additional costs have also been incurred as we respond to the changing regulatory and compliance landscape. We are committed to investing in customer services, retaining customers and strengthening the distribution of our products and services across key markets, as well as delivering operational efficiencies.

As we work to mitigate the continuing uncertainty surrounding Brexit, we have applied to the Irish insurance regulator (Central Bank of Ireland) for the authorisation of a new insurance entity. This is intended to enable Bupa Global to continue its relationships with customers who are resident or based in the EEA after the UK leaves the EU. We anticipate some cost implications in the short term.

In Colombia, we launched our first international private medical insurance (IPMI) product in partnership with Seguros Bolivar, one of the country's leading insurers. Our integration of Care Plus in Brazil continues, including the launch of IPMI products.

Bupa Hong Kong continued to focus on customer retention in all channels, including our bancassurance distribution partnership. In July, we opened our first Bupa-branded dental clinic as part of our global dental strategy. Quality HealthCare, our provision business in Hong Kong, launched a new mobile app in partnership with online healthcare provider HealthTap, which enables customers to receive an e-ticket to see a GP, make bookings with specialists at our clinics, and view their health records.

In March, we proposed a further increase in our stake in Bupa Arabia from 34.25% to 39.25%. This follows an agreement on the acquisition of a portion of Nazer Group's stake in Bupa Arabia. We have submitted formal applications to the relevant Kingdom of Saudi Arabia (KSA) authorities for the customary regulatory approvals and expect the transaction to be completed shortly. We have over 3m customers in Saudi Arabia, and we recently signed an agreement to provide services to Saudi Aramco employees.

In India, our associate business Max Bupa, launched its GOActive health insurance plan. This is Max Bupa's first digital product, and includes an integrated health and wellness platform aimed at younger customers.

FINANCIAL REVIEW

Performance in the first half of 2018 was in line with expectations. Revenue was £5.9bn, flat on prior year (2017: £5.9bn), while underlying profit declined by 11% to £329.8m (2017: £370.3m) at CER. Statutory profit increased by 9% to £306.2m (2017: £280.8m) at AER.

These results reflect our strategic framework in action. The decline in underlying profit is largely due to the divestment of a significant number of UK care homes in December 2017 and February 2018 and of our insurance operation in Thailand in July 2017. We are committed to delivering strong and sustainable performance even if reshaping our portfolio leads to reduced growth in the short term.

On a like-for-like basis, revenue grew 4%, and underlying profit was behind prior year by 2%, including six months of trading of Oasis Dental Care versus four months in 2017.

We generated cash from operating activities of £493.2m, down £84.1m on prior year, and Bupa strengthened its capital position from the 180% reported at the full year to 189% as at 30 June 2018 (2017: 160%). Our senior debt rating was upgraded by Moody's to A3 from Baa1 in May 2018.

Revenue

Insurance revenue trends are broadly unchanged from the position at full year. In Europe and Latin America, Sanitas Seguros maintained its customer and top line growth, while revenue at our UK and Australian businesses was broadly flat as growth was kept in check by pressure on household budgets. In International Markets, revenue was stable, and we are beginning to see improvements in Bupa Global and Hong Kong.

Revenue in our aged care business was constant year-on-year, excluding the disposed UK care homes. A full six months of trading following the acquisition of the Spanish Valdeluz properties in March 2017 was offset by reduced occupancy across the Group.

Provision revenues increased, and overall customer numbers grew by 10% to 9.9 million in the first half, due to the acquisition of Oasis Dental Care in the UK and strong performance in LUX MED and Bupa Chile.

Underlying profit

Underlying profit represents our trading performance and normalises for several items included in statutory profit to facilitate year-on-year comparability. These items include amortisation and impairment of intangible assets and goodwill arising on business combinations, market movements such as gains or losses from foreign exchange, on return-seeking assets, or property revaluations and other one-off items.

Underlying profit decreased by 11% to £329.8m (2017: £370.3m CER) as strong growth in the UK, and stable performance in Australia and New Zealand were more than offset by disposals, reserve-strengthening in Chile and persistent challenges in International Markets. Excluding divestments, underlying profit decreased by 2% on a like-for-like basis.

Health insurance is our largest line of business and represents the greatest proportion of underlying profit. Our three main insurance businesses in Australia, the UK and Spain have broadly maintained or improved their performance on prior year, continuing to perform well despite difficult trading conditions.

The Australian private health insurance market is impacted by pressure on household budgets and a drop-off in overall customer numbers. Despite this, profitability in our Australian business remained flat and its combined operating ratio was stable at 93%.

In Europe and Latin America, our Spanish private health insurance business, Sanitas Seguros, showed continued customer growth through a combination of partnerships and good customer retention, and our combined operating ratio was unchanged at 91%.

The UK private health insurance market remains difficult, with affordability putting pressure on customer numbers. This decline in the top line was mitigated by improved claims performance compared with the prior year period.

In International Markets, Bupa Global's result declined on the previous year. This business unit is still affected by the strategic repositioning we began in this business a number of years ago to focus on selected strategic markets. We are committed to investing in customer services, retaining customers and strengthening the distribution of our products and services across key markets, as well as delivering operational efficiencies.

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. At the half year, its combined operating ratio improved on prior year period to 94% (2017: 98%) as a result of the UK claims performance, as well as foreign exchange movements.

In aged care, we saw growth in our Spanish business, Sanitas Mayores, following the Valdeluz acquisitions, although we are experiencing pressure on occupancy rates across all our markets and a reduction in government care funding in Australia and New Zealand.

Total underlying profits in our provision businesses were stable, supported by six months of full trading in the Oasis Dental Care business and growing customer numbers in Sanitas Dental.

Statutory Profit

Statutory profit before taxation was £306.2m (2017: £280.8m) representing growth of 9% at AER. Although trading profitability has reduced on prior year, there were several non-underlying items that affected the prior year statutory figure.

Amortisation and impairment of intangibles and goodwill of £33.8m (2017: £32.7m) were broadly in line with the prior year. 2018 saw gains on disposal net of transaction costs of £8.0m compared to the £9.1m of 2017 costs predominantly associated with the Oasis acquisition, a movement of £17.1m.

The period saw positive movements in realised and unrealised foreign exchange gains of £4.9m (2017: loss of £26.9m), an increase of £31.8m. Property revaluations moved favourably by £43m, reflecting a £0.6m gain in 2018 versus an impairment of £42.4m in 2017.

Although the return-seeking asset portfolio showed losses in the first half year of £4.2m, a reversal of £15.1m on the £10.9m gain shown in the prior year period, this does not alter the overall positive statutory profit growth story.

Taxation

The effective tax rate for the period was 23.6% (2017: 25.6%), 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. The reduction in the effective tax rate compared to 2017 was mainly because of non-recurring items such as property impairments.

Our Approach to Tax is available on Bupa.com.

Cashflow

Net cash generated from operating activities fell, by £84.1m (15%) to £493.2m (2017: £577.3m). Although operational cash generation before working capital increased broadly in line with year-on-year statutory profit growth, this was offset by investment in inventory for the construction of our UK care villages and reduced receipts from accommodation bonds in our Australia and New Zealand aged care and village businesses. In Australia, we opened fewer homes than in 2017, while in New Zealand, cash inflows fell following the divestment of several care homes. This impact was partially reduced by improved cash collections elsewhere in the Group.

Net cash used in investing activities fell by £742.8m to £273.0m as we made several large one-off investments in 2017. The largest of these were, the acquisition of Oasis Dental Care, the Valdeluz care home purchases and an additional 8% shareholding in Bupa Arabia. In the current year, we have continued to invest in growth and development, finalising the construction of Bupa Clínica Santiago, opening our new UK office in Salford Quays and maintaining our care home portfolios.

The reorganisation of our UK care home portfolio, combined with several large developments in 2017, means that we have spent less on the purchase of fixed assets than prior year. We have also received proceeds from the further disposal of 22 care homes in February 2018. As a result of this, and portfolio management decisions, we increased our holdings in financial investments and long-term deposits.

Cash inflows from financing activities fell by £797.6m compared to 2017. 2017 saw significant financing activity, which has not recurred, including entering a £650m financing facility and issuing a £300m senior unsecured bond, to fund the Oasis and Bupa Arabia acquisitions.

Funding

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

Our senior debt rating was upgraded by Moody's to A3 from Baa1 in May 2018. The upgrade follows Moody's new cross sector methodology for assigning instrument ratings for insurers. Moody's modified its guidance for rating certain insurance holding company instruments, and now applies narrower notching where there is enhanced regulatory supervision at a group-wide level. Solvency II is one of the regulatory regimes that Moody's considers as providing enhanced group supervision. The Fitch rating was unchanged at A- (stable).

At 30 June 2018, we had drawn £210.0m 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 at 30 June 2018 was 25.8% (FY 2017: 25.3%). Coverage of financial covenants remains well within the levels required in our bank facilities.

Solvency position

Our parent company, The British United Provident Association Limited (Bupa), holds capital to cover its Solvency Capital Requirement (SCR), calculated on a Standard Formula Basis, considering of all our risks, including those related to non-insurance businesses.

A Group Specific Parameter (GSP) is used, having obtained approval from the Prudential Regulatory Authority (PRA) instead of the Standard Formula insurance risk parameter. This is calculated based on own loss experience and reflects the lower risk resulting from our size, expertise and geographic diversification.

Bupa's estimated SCR as at 30 June 2018 was stable when compared to year end 2017 at £2.1bn (2017 HY: £2.1bn) and Own Funds were £3.9bn, £0.2bn higher than year end (2017 HY: £3.4bn). Our business is strongly capital generative due to our profitability as shown over the past six months and this has been only partially offset by exchange rate movements.

Bupa's surplus capital was estimated to be £1.8bn, compared to £1.7bn at 31 December 2017 (2017 HY: £1.3bn), representing a solvency coverage ratio of 189% (2017 HY: 160%, 2017 FY: 180%).

In March 2018, we signed a sale and purchase agreement to further increase our stake in Bupa Arabia by 5% to 39.25%. This transaction would decrease Bupa's 30 June 2018 coverage ratio by approximately 5%.

Bupa's financial position under Solvency II differs from that of our statutory accounts. The key items of the reconciliation are: goodwill and intangibles in the IFRS statement of financial position are not recognised as available capital under Solvency II; and subordinated debt is treated as available capital under Solvency II but as a liability in the statement of financial position.

Bupa's capital comprises equity exclusive of any non-controlling interests, together with eligible subordinated debt. We have £330m of callable subordinated perpetual guaranteed bonds, a £500m dated hybrid bond which matures in 2023 and a £400m dated hybrid bond which matures in 2026. These bond issues are accounted for as liabilities in the statement of financial position but treated as capital for regulatory and management reporting purposes.

Bupa 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 Bupa's expectations for future market and business conditions. A movement in property values continues to be the most sensitive item, with a 10% movement having an 11-percentage point impact on the solvency coverage ratio.

Risk sensitivities

Outlook and upcoming changing to accounting standards

The Group will apply IFRS 16 (Operating Leases) from the beginning of 2019. The application of the standard will bring additional assets and liabilities onto our balance sheet which in turn will impact the calculation of our capital position under the standard formula. Following implementation, we anticipate capital coverage continuing to be comfortably above our risk appetite.

BUSINESS RISKS

The main risks we face are described in the Risks section of the Bupa Finance Annual Report and Accounts 2017. In the period to 30 June 2018 there were no significant changes to the nature of these risks. 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, conduct, and clinical risk.

Economic and political conditions in our markets could affect our business. These might include structural shifts (such as political changes, medical inflation, minimum wage increases) and economic volatility. We keep our strategy and processes under review to ensure they are flexible enough to react to changing external conditions. Regulatory focus is generally increasing in the markets in which we operate.

As set out in the notes to the half year financial statements, our Australian businesses currently have contingent liabilities arising in the ordinary course of business due to unresolved issues associated with the application of Australian tax law in relation to cross border transactions and operations. The issues are ongoing with uncertain future outcomes and we consider that the positions adopted are in accordance with the tax law and we intend to defend our position with respect to these matters. Also, as we say in the disclosures, we do not consider that the ultimate outcome of any contingent liabilities will have a significant adverse impact on the financial condition of the Group.

There is uncertainty surrounding the arrangements for the UK leaving the EU. We are closely monitoring negotiations, especially those surrounding the regulation of financial services, the wider impact on the UK economy, and the UK's future immigration rules for EU nationals. In Europe, our Bupa Global business relies on passporting rights to undertake cross-border activities between the UK and the rest of the EU for the sale of international private medical insurance (IPMI) and travel insurance. Our priority is to minimise the disruption for our IPMI customers in the EEA and to continue to deliver the highest standards of service for them.

By monitoring and managing our risks, we seek to ensure that we are meeting the changing expectations of our customers, investors and regulators. We continue to strengthen our risk management processes and capability as we respond to growth in our business and the increasing demands of regulators globally. Internal controls, particularly with regard to information security and privacy, remain a key focus.

BUPA AROUND THE WORLD

Bupa is organised across four Market Units:

Australia and New Zealand

Europe and Latin America

UK

International Markets

Bupa Finance plc

(Company No. 2779134)

Condensed consolidated half year financial statements (unaudited)

Six months ended 30 June 2018

Bupa Finance plc

Condensed Consolidated Income Statement (unaudited)

for the six months ended 30 June 2018

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

Bupa Finance plc

Condensed Consolidated Statement of Comprehensive Income (unaudited)

for the six months ended 30 June 2018

Bupa Finance plc

Condensed Consolidated Statement of Financial Position (unaudited)

as at 30 June 2018

Bupa Finance plc

Condensed Consolidated Statement of Cash Flows (unaudited)

for the six months ended 30 June 2018

1 Opening cash and cash equivalents adjusted to reflect ECL provision for investments less than 3 months on adoption of IFRS 9 (£0.5m).

2 At 30 June 2018 Cash and cash equivalents includes £nil (HY 2017: £28.7m, FY 2017: £nil) of assets held for sale.

Bupa Finance plc

Notes to the Condensed Consolidated Financial Statements (unaudited)

for the six months ended 30 June 2018

Bupa Finance plc

Condensed Consolidated Statement of Changes in Equity (unaudited)

for the year ended 31 December 2017

Bupa Finance plc

Condensed Consolidated Statement of Changes in Equity (unaudited)

for six months ended 30 June 2017

Bupa Finance plc

Notes to the Condensed Consolidated Financial Statements (unaudited)

for the six months ended 30 June 2018

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 2018 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 and Transparency Rules of the Financial Conduct Authority and with International Accounting Standard 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 2017, which have been prepared in accordance with the International Financial Reporting Standards as adopted by the EU (IFRS).

The interim financial statements were approved by the Board of Directors of Bupa Finance plc on 1 August 2018.

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 2017 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 Directors' Report for the year ended 31 December 2017. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Financial Review of the Directors' Report for the year ended 31 December 2017.

The Group's £800.0m committed bank facility, which matures in August 2022, was drawn down by £210.0m at 30 June 2018.

1.3 Changes in accounting polices

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

1.3.1 IFRS 15

The Group has adopted IFRS 15 Revenue from Contracts with Customers with a date of initial application of 1 January 2018.

The Group has applied IFRS 15 retrospectively with the cumulative effect of initially applying IFRS 15 recognised as an adjustment to the opening balance of retained earnings at the date of initial application of 1 January 2018. Therefore, the comparative information has not been restated and continues to be reported under IAS 18 and IAS 11.

IFRS 15 establishes principles that an entity can apply to report information about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer and is based on the principle that revenue is recognised when control of a good or service transfers to a customer. It replaces IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate and IFRIC 18 Transfers of Assets from Customers. IFRS 15 does not apply to revenue related to insurance or leasing contracts.

The application of IFRS 15 has not resulted in any significant changes in revenue recognition, as the Group's revenue streams are generally for short-term services that have fixed, rather than variable transaction prices and there is no significant judgement to be applied when considering the time pattern of revenue recognition. Where there are variable revenue streams i.e. service concession arrangements, these have been assessed and there is not deemed to be a significant risk of reversal. Changes in timing of revenue recognition reduce the opening balance of retained earnings by £1.1m.

1.3.2 IFRS 9

The Group has adopted IFRS 9 Financial Instruments: classification and measurement, with a date of initial application of1 January 2018. The Group did not early adopt any of IFRS 9 in previous periods and is not eligible for the deferral approach (giving companies whose activities are predominantly connected with insurance an optional temporary exemption from applying IFRS 9 until 2021).

The Group has applied IFRS 9 retrospectively with the cumulative effect of initially applying IFRS 9 recognised as an adjustment to the opening balance of retained earnings at the date of initial application of 1 January 2018. Therefore, the comparative information has not been restated and continues to be reported under IAS 39.

IFRS 9 Financial Instruments addresses the classification, measurement and de-recognition of financial assets and financial liabilities, introduces new rules for hedge accounting and a new impairment model for financial assets.

The Group's debt instruments that were previously designated as available-for-sale under IAS 39, satisfy the conditions for classification as hold to collect under IFRS 9 and are measured at amortised cost. See note 10 for details of the classification of financial investments under IFRS 9.

The new impairment model requires the recognition of impairment provisions based on expected credit losses (ECL) rather than only incurred credit losses as is the case under IAS 39. It applies to financial assets classified at amortised cost, debt instruments measured at fair value through other comprehensive income (FVOCI), and trade and other receivables. The Group holds high quality financial investments and the provisions established under IFRS 9 are not significant.

The Group's hedge relationships continue to qualify as continuing hedges upon the adoption of IFRS 9.

1.4 Accounting estimates and judgements

The preparation of the condensed consolidated half year financial statements requires the use of certain accounting estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. It also requires management to exercise judgement in applying the Group's accounting policies. The significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that were applied to the annual financial statements for the year ended 31 December 2017.

1.5 Accounting policies and forthcoming financial reporting requirements

1.5.1 IFRS 16 Leases

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 mandatory effective date for applying IFRS 16 is for annual periods beginning on or after 1 January 2019. IFRS 16 was endorsed by the EU on 31 October 2017.

IFRS 16 will result in almost all leases being recognised on the balance sheet for lessees, as the distinction between operating and finance leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognised. The only exceptions are short-term and low-value leases. The accounting for lessors will not significantly change.

The impact of IFRS 16 on the financial statements is currently being evaluated by the Group. The standard will primarily impact the accounting for the Group's operating leases. Operating lease commitments as disclosed in the 2017 accounts was £1,161.1m.

1.6 Foreign exchange

The following significant exchange rates applied during the period:

1.7 Events occurring after the reporting period 

There have been no material events or transactions between the end of the reporting period and the reporting date.

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.

Revenue for the six months ended 30 June 2018 has been analysed at business unit level, reflecting the requirements ofIFRS 15:

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, excluding items relating to business combinations and disposals, fluctuations in foreign exchange, property revaluations and investment return on return seeking assets, along with other one-off items. Adjustments made exclude items derived from the application of Group accounting policies which are not directly related to the underlying trading performance of the business.

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

- Amortisation and impairment of intangible assets and goodwill arising on business combinations - impairment reviews are performed at least annually. Although driven by trading performance, goodwill impairments are considered to be one-off and not reflective of the ongoing trading performance of the business. Amortisation and impairment of internally generated intangible assets and purchased computer software is included within underlying profit.

- Net gains/losses on disposal of businesses and transaction costs on business combinations - gains/losses on disposal of businesses are not considered part of the continuing business and are one-off in nature; transaction costs incurred for acquisitions or disposals are not related to the 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.

- Foreign exchange volatility - short-term fluctuations outside of management control, which would distort underlying trading performance,

- Other Market Unit non-underlying items - include impairment of investment in associates, Market Unit restructuring costs (which are one-off and outside the normal operations of the business) and net gains/losses on disposal of fixed assets (not part of the continuing business or trading activity).

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

- Central non-underlying items - include central items of a one-off nature and outside normal operations, such as central restructuring costs, net gains/losses on disposal of fixed assets, and treasury foreign exchange gains/losses.

1 Underlying profit for reportable segments includes share of post-taxation results of equity accounted investments. International Markets includes Bupa Arabia, Max Bupa and Highway to Health.

2 Includes £7.5m profit on disposal of a 33.33% share of Forsikringens Datacenter A/S and £0.9m on the sale of Bupa Medical Alarms in New Zealand.

3 Includes investment property gains of £7.4m and write downs of £6.8m on freehold property.

4 Represents £0.3m of foreign exchange gains.

1 Underlying profit for reportable segments includes share of post-taxation results of equity accounted investments. International Markets includes Bupa Arabia, Max Bupa and Highway to Health.

2 Includes £8.9m transactions costs relating to the acquisition of Oasis Dental Care, see Note 16.

3 Includes £49.2m write down on assets held for sale. See Notes 3 and 13.

4 Represents £0.3m of foreign exchange gains.