Solvency and Financial Condition Report

Transcription

1 Solvency and Financial Condition Report 31 December 2016

2 Contents Summary... 3 A. Business and Performance... 7 A.1 Business... 7 A.2 Underwriting performance A.3 Investment performance A.4 Performance from other activities A.5 Any other information B. System of Governance B.1 General information on the system of governance B.2 Fit and proper requirements B.3 Risk management system including Own Risk and Solvency Assessment B.4 Internal control system B.5 Internal audit function B.6 Actuarial function B.7 Outsourcing B.8 Any other information C. Risk Profile C.1 Underwriting risk C.2 Market risk C.3 Credit risk C.4 Liquidity risk C.5 Operational risk C.6 Other material risks C.7 Any other information D. Valuation for Solvency Purposes D.1 Assets D.2 Technical provisions D.3 Other liabilities D.4 Alternative methods for valuation D.5 Any other information E. Capital Management E.1 Own Funds E.2 Solvency Capital Requirement and Minimum Capital Requirement E.3 Use of the duration-based equity risk sub-module in the calculation of the SCR E.4 Differences between the standard formula and any internal model used E.5 Non-compliance with the Minimum Capital Requirement and Solvency Capital Requirement.. 58 E.6 Any other information Directors responsibility statement Independent auditor s opinion Glossary Annex reporting templates... 64

3 Summary (Unaudited) BUSINESS AND PERFORMANCE The British United Provident Association Limited (the Company ) and its subsidiaries comprise the Group ( or the Group ). 's purpose is helping people live longer, healthier, happier lives. The Company s status, limited by guarantee with no shareholders, enables us to make customers our absolute focus. This means we can reinvest our profits to provide more and better healthcare for current and future customers and policyholders. We employ 86,000 people, principally in the UK, Australia, Spain, Hong Kong, Poland, New Zealand, Chile, Brazil, Thailand, China, Saudi Arabia, India and the US. Around 70% of our revenue is from health insurance, with the rest from health and care provision. We fund healthcare around the world through insurance and run clinics, dental centres, hospitals, care homes and retirement villages in a number of countries. 's Strategic Framework Our strategy has three pillars: Customers, People, and Performance. We put our customers front and centre in the context of today s digital age. As a service organisation, everything we do for our customers relies on our people and partners, so being a place where people love to work is critical to our success. This, combined with disciplined risk and capital management, is how we will deliver strong and sustainable performance. We have a number of priorities: 1. Becoming loved as a true customer champion in health and care: creating excellent customer experiences and outcomes, delivering value for money, providing exceptional care and helping customers navigate the complex world of healthcare. 2. Being a place where our people love working, and love our customers: engaging and empowering our people to make a real difference for our customers, living our values, in an environment that enables and inspires them, so they are happier and healthier because they work at. 3. Digital transformation and continuous improvement: focused on improving all aspects of people s experience whether they are customers, employees, providers or partners focusing on making processes easier, driving improvement, pace and connectivity across. Our operating approach is to: Invest in strength and depth prioritising our existing businesses, with selective expansion into new markets. Win locally, enabled globally, organising to meet the individual and local needs of our customers and partners, whilst leveraging broader capabilities in support of these. Be ever-focused on quality, efficiency, safety and compliance recognising we operate in highly sensitive and heavily regulated sectors and need to uphold the highest standards. SYSTEM OF GOVERNANCE s stated aim is to operate to the governance standards required of FTSE 100 companies, where appropriate. s structure is designed to enable the Board to lead within a governance framework of prudent and effective controls. This enables risks to be assessed and managed. All Board and Board Committee members are provided with sufficient resources to undertake their duties, including access to both internal and external specialist advice at s expense. The Directors individually and collectively act in accordance with their duties under the Companies Act 2006 and other applicable legislation. 3

4 During 2016 there were a number of changes to the Board. Evelyn Bourke became Group Chief Executive Officer (CEO) and Joy Linton became Chief Financial Officer (CFO). Simon Blair and Janet Voûte joined the Board as Non-Executive Directors while Rita Clifton stepped down from the Board. The Board Committee structure is as follows: employs a three lines of defence governance model to ensure that risk management is effective, appropriate decisions are made and best practice is implemented and maintained. Broadly the responsibility of the three lines is as follows: First line: business management is responsible for the identification and assessment of risks and implementation of appropriate controls and monitoring, as well as for developing and implementing mitigation plans where necessary. Second line: risk functions provide support and challenge the completeness and accuracy of risk assessments and the adequacy of mitigation plans. Third line: internal audit provides independent and objective assurance on the robustness of the risk management framework, and the appropriateness and effectiveness of internal controls. RISK PROFILE accepts risks as part of its business operation. Some risks are avoidable (e.g. certain financial risks) and others are part and parcel of s business model (e.g. operational risks). We consider that we have an effective risk management system and appropriate internal controls in place to mitigate our risks. maintains significant economic capital as a mitigant against certain inherent risks. These reflect the nature of our operations and the level of risk associated with them. The Group Solvency Capital Requirement (SCR) is calculated in accordance with the standard formula specified in the Solvency II legislation. has obtained approval from the Prudential Regulation Authority (PRA) to substitute the insurance premium risk parameter in the standard formula with an Undertaking Specific Parameter (USP) which reflects s own loss experience. Replacing the standard parameter for insurance premium risk with our own reflects the lower risk that our size, experience and geographic diversification brings. The distribution of the Group s quantifiable risks, as reflected in the SCR, is as follows: % of diversified SCR Analysis of the SCR 2016 Underwriting risk 19% Market risk 60% Credit risk 4% Operational risk 11% Participations (associates) 6% 100% 4

5 The SCR profile of the Group has not changed materially over the past 12 months. The single largest risk component of our SCR is property risk, within market risk in the table above, almost all of which relates to s ownership of freehold properties associated with the care home businesses in the UK, Australia and New Zealand. These properties are held in separate companies which are separate from insurance entities. Therefore our insurance policyholders are not directly exposed to the volatility of the value of these properties. VALUATION FOR SOLVENCY PURPOSES Solvency II requires an economic market consistent approach to the valuation of assets and liabilities. A number of assets and liabilities require different valuation methods to those used in the financial statements prepared under International Financial Reporting Standards (IFRS). The valuation differences are summarised as follows: Reconciliation of IFRS equity to Solvency II excess of assets over liabilities Equity attributable to in IFRS financial statements 6,575 5,424 Valuation differences: Assets Goodwill and intangibles (3,391) (2,862) Equipment (81) (229) Investments (131) (91) Property securitisation and other - (54) Liabilities Technical provisions Deferred tax liabilities Financial and subordinated liabilities (45) (88) Solvency II excess of assets over liabilities 3,273 2,429 Section D includes information on the valuation basis adopted for each class of assets and liabilities and also provides an explanation of valuation differences arising when moving from the valuation basis used in the Group s financial statements to the Solvency II valuation basis. CAPITAL MANAGEMENT The Group s capital management objective is to maintain sufficient capital to protect the interests of its customers, investors, regulators and trading partners while deploying capital efficiently and managing risk to enable to continue to deliver its purpose in a sustainable manner. All profits are therefore reinvested to develop the Group s business for the benefit of current and future customers. Capital structure Unrestricted tier 1 2,897 2,242 Restricted tier 1 - subordinated perpetual bonds Tier 2-5% subordinated unguaranteed bonds Solvency II eligible Own Funds 4,194 3,126 Our capital comprises equity (retained earnings), exclusive of any non-controlling interests, together with eligible subordinated liabilities. We have 330m of callable subordinated perpetual guaranteed bonds, with a Solvency II value of 384m; a 500m dated hybrid bond which matures on 25 April 2023 and a 400m dated hybrid bond which matures on 8 December 2026, with a combined Solvency II value of 913m. These bond issues are accounted for as liabilities in the IFRS financial statements, but are treated as tier 1 restricted and tier 2 solvency capital for regulatory and management purposes. At 31 December 2016, our eligible Own Funds, determined in accordance with the Solvency II valuation rules, were 4.2bn (2015: 3.1bn), which was in excess of our SCR of 2.1bn (2015: 1.8bn). This represented a solvency coverage ratio of 204% (2015: 178%). The completion of the purchase of Oasis Dental Care in February 2017 reduced our coverage ratio to an estimated 165%

6 Solvency II Capital Position Eligible Own Funds 4,194 3,126 SCR (2,052) (1,759) Surplus 2,142 1,367 Solvency ratio 204% 178% The Group s capital resources are managed in line with the Group Capital Management Policy. All regulated entities within the Group maintain sufficient capital resources to meet any local regulatory minimum capital requirements. In addition, the Group and regulated entities maintain a buffer in excess of the regulatory minimum requirements in line with their capital risk appetites. During the year, the Group and its subsidiaries complied with all externally imposed capital requirements to which they were subject. The Group s capital position is kept under constant review and is reported monthly to the Board. OTHER INFORMATION In line with PRA requirements, sections D. Valuation for Solvency Purposes and E. Capital Management of the Solvency and Financial Condition Report (SFCR) have been subject to audit by the external auditor. Sections A. Business and Performance, B. System of Governance and C. Risk Profile are unaudited

7 A. Business and Performance (Unaudited) A.1 Business A.1.1 Company information The British United Provident Association Limited ( the Company ), the ultimate parent entity of the Group, is a private company limited by guarantee without share capital, incorporated in England and Wales under the company registration number The Company does not have shareholders. The governance is exercised through the Board, which operates along the lines of boards of FTSE 100 companies and through approximately one hundred Association Members (AMs) who act in lieu of shareholders. The AMs vote at the Annual General Meetings on director reappointments, adoption of the financial statements and remuneration of the executive directors. They are not entitled to any part of the assets or income of the Company. No individual has 10% or more voting rights or any other mechanism of control of the Company. Our status as a private company, limited by guarantee, with no shareholders means we are not driven by shortterm profit. We are able to take a long-term view and reinvest our profit with a focus on delivering our purpose of helping people live longer, healthier, happier lives. The Group supervisor is the PRA, Bank of England, 20 Moorgate, London EC2R 6DA. The Group s external auditor is KPMG LLP, Chartered Accountants, 15 Canada Square, London, E14 5GL. A copy of the Group s Annual Report and Accounts is available on the Group s website at: bupa.com/corporate/our-performance/annual-report. In addition to the Group SFCR, the individual regulated undertakings within the European Economic Area (EEA) produce solo entity SFCRs: Insurance Limited ( BINS ), Sanitas S.A. de Seguros ( Sanitas Seguros ) and LMG Försäkrings AB. A.1.2 Legal Structure Information is provided below on the Group s principal insurance and non-insurance undertakings. A full list of the Group s subsidiaries and other material undertakings is included on the quantitative reporting template (QRT) S Undertakings in of the group, included in the attached Annex. For each undertaking the QRT provides a description of the type of undertaking, country and proportion of ownership interest held. All companies in the Group that are controlled by are considered to be: (i) insurance or reinsurance undertakings; (ii) insurance holding companies; or (iii) ancillary services undertakings. Therefore all companies are subject to full. Investments in associates and joint ventures are accounted for using the adjusted equity method with assets and liabilities valued using Solvency II valuation methods. Group structure chart The simplified group structure chart on the following page provides information on the ownership and the country of the Group s principal insurance and non-insurance entities, as at 31 December The structure chart includes Arabia For Cooperative Insurance Company ( Arabia), an insurance entity of which the Group holds a 26.25%. Under Solvency II, Arabia is treated as a related undertaking and the Group s investment in Arabia is recognised as a participation. On 11 May 2017 the Group announced its intention to increase its stake in Arabia by 8% from 26.25% to 34.25%. The transaction completed in June

8 s Insurance & Non-Insurance Entities The British United Provident Association Limited England, Key: Insurance Entities Care and Health Provision Entities Finance Plc England, Branch Investments Limited England, Investments Overseas Limited England, Insurance Limited England, Insurance Services Limited England, Cromwell Health Group Limited England, International Limited Hong Kong, Ownership: % ( % held by The British United Provident Association Limited) Richmond Care Villages Holdings Limited England, Amedex Insurance Company (Bermuda) Limited Bermuda, Ownership 70% (30% held by US Holdings, Inc) Occupational Health Limited England, Investments Overseas Limited, Surcusal en Espana (Branch) Spain Arabia for Cooperative Insurance Company Saudi Arabia, Ownership: 26.25% LUX MED Sp z o.o. Poland, Global Holdings Limited England, ANZ Insurance Pty Limited Australia, ANZ Healthcare Holdings Pty Limited Australia, Medical Services International Limited England, Altai Investments Limited BVI, (Asia) Limited Hong Kong, Ownership: 70% (30% held by Investments Limited) Richmond Villages Operations Limited England, Grupo Sanitas SLU Spain, B Sanitas Holding, S.L.U. Spain, B Insurance Company Florida USA, do Brasil Saúde Ltda Brazil, / Ownership: 99% (1% held by Investments Overseas Ltd) HI Holdings Pty Limited Australia, Health Services Pty Ltd Australia, Aged Care Holdings Pty Ltd Australia, Quality HealthCare Medical Services Limited Hong Kong, Sanitas Nuevos Negocios, S.L.U. Spain, B Especializada y Primaria L Horta Manises, SAU Spain, A Care Homes (CFG) Plc England, Ownership: % ( % held by The British United Provident Association Limited) Sanitas Mayores, SL Spain, B Ownership: 63.01% (36.99% held by Sanitas SL de Diversificacion) Torrejon Salud S.A. Spain, A Ownership: 60% Grupo Sanitas Chile Uno, SpA Chile, Sanitas SA de Seguros Spain, A Ownership: 99.89% Sanitas SA de Hospitales Sociedad Unipersonal Spain, A Service Care Participações e Negócios S.A Brazil, / HI Pty Limited Australia, Dental Corporation Limited Australia, Aged Care Australasia Pty Limited Australia, Care Services NZ Limited New Zealand, Care Homes Group Limited England, Chile S.A. Chile, Personal System Serviços Médicos e Odontológicos Ltda Brazil, / Ownership: 99.87% (0.13% held by do Brasil Saude Ltda) Care Plus Medicina Assistencial Ltda Brazil, / Ownership: 75% (25% held by do Brasil Saude Ltda) Dental Corporation Holdings Limited Australia, Aged Care Australia Holdings Pty Ltd Australia, Care Homes (ANS) Limited England, Isapre Cruz Blanca S.A. Chile, Ownership: % (4.5% held by Inversiones Clinicas Pukara S.A.) Integramedica S.A. Chile, K Ownership: % Inversiones Clinicas CBS S.A. Chile, Ownership: % (0.002% held by Chile Servicios Corporativos SpA) Care Plus Negócios Em Saúde Ltda Brazil, / Ownership: 99.99% (0.01% held by do Brasil Saude Ltda) Aged Care Australia Pty Limited Australia, Care Homes (BNH) Limited England, Care Homes (CFCHomes) Limited England, Care Homes (CFHCare) Limited England,

9 Insurance entities The Group has a number of insurance entities across all Market Units. The written premium net of reinsurance of the Group s principal insurance undertakings is shown below, by value and as a proportion of the Group total. Written premium net of reinsurance by entity Country Market Unit HI Pty Ltd Australia ANZ 3,573 45% BINS 1 UK UK and IM 2,272 28% Sanitas Seguros Spain ELA 1,003 13% Isapre Cruz Blanca S.A. 2 Chile ELA 583 7% Insurance Company United States IM 217 3% (Asia) Ltd Hong Kong IM 230 3% Others % Total written premium net of reinsurance 7, % 1. BINS provides domestic health insurance in the UK through the UK Market Unit and provides international health insurance to individual consumers and employees around the world, through the International Markets Market Unit. 2. Isapre Cruz Blanca, a subsidiary of Chile S.A., is regulated by the Chile Ministry of Health. Its products fit the Solvency II definition of an insurance product and we consider that it would be regulated as a health insurance entity if it were based in the UK. Therefore revenue from the company s insurance products is recognised as net earned premium in the Group s financial statements. A separate Group company, Cruz Blanca Compania de Seguros de Vida S.A., is an insurance entity regulated in Chile. The premiums earned by Cruz Blanca Compania de Seguros de Vida S.A are not material. 3. On 22 December 2016, the Group acquired 100% of Care Plus, a premium health insurer in Brazil, for 91m (BRL 431m). The business provides dental insurance as well as health insurance and has small occupational health, travel insurance and clinics businesses. If the transaction had occurred on 1 January 2016, Care Plus would have contributed 150m (BRL 710m) revenue. The premium figures represent written premium, excluding inwards intra-group reassurance, measured in accordance with Group accounting policies. Health and care provision entities The revenue of the Group s principal undertakings providing health and care provision is shown below, by value and as a proportion of the Group s total non-insurance revenue. Non-insurance revenue by entity Country Market Unit Care Homes (CFHCare) Limited UK UK 254 8% Care Homes (ANS) Limited UK UK 133 4% Care Homes (CFCHomes) Limited UK UK 106 3% Care Homes (BNH) Limited UK UK 90 3% Medical Services International Limited UK UK 102 3% Occupational Health Limited UK UK 61 2% Richmond Villages Operations Limited UK UK 55 2% Home Healthcare Limited 1 UK UK 246 8% Aged Care Australia Pty Ltd Australia ANZ % Dental Corporation Pty Limited Australia ANZ 179 6% Care Services NZ Limited New Zealand ANZ 134 4% LUX MED Sp. Z.o.o. Poland ELA 204 7% Sanitas S.A. de Hospitales S.U. Spain ELA 205 7% Sanitas Nuevos Negocios S.L.U. Spain ELA 60 2% Integramedica S.A. Chile ELA 155 5% Especializada y Primaria L Horta-Manises S.A.U. Spain ELA 126 4% Torrejón Salud S.A. Spain ELA 81 3% Sanitas Mayores, S.L. Spain ELA 82 3% Quality HealthCare Medical Services Limited Hong Kong IM 79 3% Others % Total non-insurance revenue 3, % 1. During 2016, the Group disposed of Home Healthcare Limited % 2016 % 9

10 Non-insurance revenue includes care, health and other revenues plus revenue from insurance service contracts, as reported in the Group s financial statements. Other entities The Group s principal other entities are listed below: Company name Activity Country Finance Plc Insurance holding company UK Investments Limited Insurance holding company UK Investments Overseas Limited Insurance holding company UK Insurance Services Limited Ancillary services undertaking UK ANZ Insurance Pty Ltd Insurance holding company Australia HI Holdings Pty Ltd Insurance holding company Australia Branches The only branch in the Group which falls within the Solvency II definition of significant branches is Malta. BINS has an agency agreement with an entity registered in Malta, trading as Malta. Malta acts as an insurance agent selling non-life international health insurance and is regulated by the Malta Financial Services Authority. For the year ended 31 December 2016, Malta s gross written premium was 7m. A.1.3 Organisational structure The organisational structure consists of four Market Units, enabled through global functions, covering Medical, People, Information Systems, Finance & Governance, Strategy, Corporate Affairs, Marketing, Risk & Compliance and Legal, each with a functional director. Each Market Unit has an executive team headed by a CEO. Each Market Unit includes a number of Business Units and each Business Unit is headed by a General Manager. The Executive Team (BET) is comprised of the Group CEO, who chairs the meetings, the CFO, the CEOs of the four Market Units and all Global Function Directors. The BET meets regularly throughout the year to focus on s global strategic agenda, which supports each BET member as they manage performance and risk in their individual roles. Information on the Group s governance structure is provided in section B.1: General information on the system of governance. The Market Unit structure enables us to better serve our customers where they are and support our growth. The four Market Units comprise individual businesses that reflect our services: Australia and New Zealand (ANZ) Health Insurance, the leading health insurance provider in Australia with four million customers, which also offers health insurance for overseas workers and visitors. Health Services, a health provision business which comprises Dental, Optical, Medical Visa Services, Medical TeleHealth and Medical GP Clinics. Aged Care, the largest privately-owned residential aged care provider in Australia, caring for nearly 7,000 residents across 71 homes. New Zealand Care Services, a leading aged care provider caring for 4,000 people in 62 homes, 33 retirement villages, seven rehabilitation sites and a medical alarm network. UK UK Insurance, the UK s leading health insurer with 2.4 million customers. Care Services, caring for 17,400 people in 279 homes and six Richmond Villages and 21 Goldsborough Estates retirement and assisted-living properties. Health Clinics, wellness centres, health clinics and dental practices. 10

11 Cromwell Hospital, a complex care hospital in London providing care for insured, self-pay, NHS and international patients. Dental UK, comprising 420 Oasis and dental practices, with more than 1,800 clinicians serving over 2 million patients. Europe and Latin America (ELA) Sanitas Seguros, the second largest health insurance provider in Spain with 1.5 million customers. Sanitas Hospitales and New Services, four private hospitals, 34 private medical clinics and two public-private partnership hospitals in Spain. Sanitas Dental, dental insurance and provision through 184 centres and third-party networks in Spain. Sanitas Mayores, caring for nearly 5,000 people in 40 care homes and three day care centres in Spain. LUX MED, the largest private healthcare business in Poland with seven hospitals and 186 private clinics. Chile, a leading health insurer and provider with three hospitals and 37 medical clinics. International Markets (IM) Global, international health insurance, travel insurance and medical assistance provided worldwide to individuals, small businesses and global corporate customers. Arabia, an associate company, in which has a 26.25% stake, increasing to 34.25% during 2017; the largest health insurance business in Saudi Arabia. Max, an associate between and Max India Limited in which holds a 49% stake; a leading private health insurer. Hong Kong, a leading private health insurer in Hong Kong. Quality HealthCare, a leading private clinic network in Hong Kong. Thailand, a leading specialist health insurer. China, our representative office in China. A.1.4 events in the year To equip for the next phase of growth, in 2016 we refreshed our strategy, putting customers front and centre in the context of today s digital age. As a service organisation, it is critical our people love working at and delivering for customers. Insurance, healthcare and care services are highly sensitive and regulated sectors and we are increasing our focus on management of risk and compliance to ensure we continue to uphold the high standards our customers and regulators expect. Through rigorous capital management, and investing in strength and depth in our existing markets with selective expansion into new growth markets, we will deliver strong and sustainable performance for our customers and for. The Group acquired 100% ownership of Chile in 2016 for 93m. The transaction occurred in two stages; on 8 January 2016 the Group secured a further 26% interest in Chile taking its shareholding to 99.7%, with the remaining 0.3% shareholding acquired on 26 February In India, we increased our shareholding of Max from 26% to 49% in June 2016 following a change in the law allowing greater foreign ownership. In July we exited the home healthcare market in the UK with the sale of Home Healthcare. In July, we also reshaped our operating structure, reducing from five to four Market Units with Europe and Latin America replacing Spain and Latin America, and International Markets replacing International Development Markets and Global. In November 2016, we agreed the purchase of Oasis Dental Care for an enterprise value of 835m and completed the transaction in February In December 2016, we completed the purchase of Care Plus for 91m, a market leading health insurer in Brazil, which serves more than 400 companies with around 100,000 customers. 11

12 During the year we simplified our debt arrangements, including unwinding a securitisation over UK care home assets and issuing 400m of subordinated bonds maturing in 2026 with a 5% coupon. As a result of a review of the UK care services business, a number of homes are classified as held for sale in the IFRS financial statements as at 31 December In addition an office building in the UK is held for sale following a decision to sell the property. Contracts have been exchanged on the sale of the office building and the sale is expected to be completed in the latter part of The total value of net assets classified as held for sale in the IFRS financial statements as at 31 December 2016 is 460m. On 11 May 2017 the Group announced its intention to increase its stake in Arabia by 8% from 26.25% to 34.25%. The transaction completed in June Organisation changes in the year Stuart Fletcher stepped down as Group CEO in April 2016, with Evelyn Bourke, our CFO at the time, taking over in an acting capacity. At the same time Joy Linton was appointed as Acting CFO and joined the Board. In July, Evelyn was appointed to the role of Group CEO and Joy Linton was appointed CFO. A number of changes were also made to the Executive Team. Dean Holden, former Managing Director of Australia and New Zealand, stepped down and Richard Bowden was appointed as CEO of Australia and New Zealand. David Hynam succeeded Richard Bowden as CEO of the UK. Robert Lang, former Managing Director of International Markets, left to pursue new opportunities and Wayne Close was appointed Acting CEO of International Markets. The role of Chief Risk Officer (CRO) became part of the Executive Team, reflecting our increased focus on risk and compliance, with David Fletcher appointed to the position. Gabriela Pueyo became Chief Strategy Officer. Paul Newton retired as Chief Legal Officer and Penny Dudley replaced him. A.1.5 Summary of performance in the year In 2016, our businesses performed solidly in challenging market conditions. We achieved good profit growth in our three largest Market Units Australia and New Zealand, the UK, and Europe and Latin America. While performance within International Markets was impacted by a significant decline in profit in Global, the overall Group delivered growth in revenue of 4%, and underlying profit of 10% at constant exchange rates (albeit up 2% when excluding the impact of the adjustment relating to our Spanish Public Private Partnerships (PPPs) in 2015). Our performance in 2016 was bolstered by strong and consistent cash flow, a strong balance sheet, robust management and an upgrade in one of our credit ratings. In Australia and New Zealand, we delivered good revenue and underlying profit growth in difficult market conditions, and our Australian health insurance business became the country s biggest health insurer for the first time. The Australian Government is considering reforms of the health insurance sector, and affordability remains a challenge for the whole healthcare industry. Changes to the Australian Aged Care Funding Instrument will reduce aged care sector funding, particularly for residents with complex care needs, and are expected to impact the whole aged care sector. We are urging the government to take a collaborative approach to working with the sector on delivering value through innovation. In the UK, we achieved good underlying profit growth despite continued market pressures. Revenue was down due to the disposal of Home Healthcare in July. If Home Healthcare revenue is removed from 2015 and 2016 performance, UK revenue is up 5%. During 2016 the UK Government further increased the Insurance Premium Tax which challenges the affordability of health insurance. Together with industry partners, we are championing the role of independent healthcare and campaigning to make it more affordable for customers. Over the year we made progress in reshaping our portfolio. In July, we exited the home healthcare market with the disposal of Home Healthcare. In November, we announced our agreement to purchase Oasis Dental Care. Through this purchase will become a major dental provider in the UK s 7.1bn dental market. We also undertook a portfolio review of our UK care services business. 12

13 In Europe and Latin America, we delivered strong growth in revenue and underlying profit. In Spain, we grew our dental and health insurance businesses, while our PPPs are meeting their profit targets and providing high quality medical services in a difficult political environment. LUX MED, our business in Poland, performed well primarily due to good performance in our ambulatory and inpatient businesses. Chile achieved strong revenue growth, despite challenging conditions affecting the Chilean private health insurance sector. Our close management of claims and operating cost controls have supported profitability. In International Markets the profit decline in Global was driven by the ongoing impact of our decision to exit non-strategic markets which led to high lapses in the period, as well as our investment in capability and infrastructure to improve the customer experience and grow our corporate book, and a lower than anticipated rate of growth in our individual and small and medium enterprise books. While progress is being made, there will continue to be some impact on performance in In December, we acquired Care Plus, a market leading health insurer in Brazil, which serves more than 400 companies with around 100,000 customers. Sections A.2 to A.4 of the SFCR provide a summary of performance across three categories: underwriting activities, investment activities and other. The following table explains how the Group s income and expenses, as reported in the Group s financial statements, is analysed across the three categories. Year ended 31 December 2016 Section Total Underwriting Investment Other Revenues Gross insurance premiums A.2 8,044 8, Premiums ceded to reinsurers A.2 (54) (54) - - Net insurance premiums earned 7,990 7, Revenues from service contracts A Care, health and other revenues A.4.2 3, ,039 Total revenues 11,048 7,990-3,058 Claims and expenses Insurance claims incurred A.2 (6,333) (6,333) - - Reinsurers share of claims incurred A Net insurance claims incurred (6,290) (6,290) - - Share of post-taxation results of equity accounted investments A Other operating expenses A.4.4 (4,197) (1,170) - (3,027) Other income and charges A.4.5 (39) (2) - (37) Total claims and expenses (10,496) (7,462) - (3,034) Financial income and expenses Financial income A Financial expenses A.3.2/A.4.6 (241) - (3) (238) Net financial expense (29) (238) Profit before taxation expense 523 Taxation expense (136) Profit for the financial year 387 Outlook Looking ahead, we expect conditions to remain challenging in our key markets with changing political environments, including the UK preparing to exit the European Union. Demand for quality and value-for-money healthcare will remain strong for years to come, however governments and consumers face funding pressures and medical costs are outpacing inflation. In addition, there are new customer standards of personalisation, ease and choice as well as high expectations of quality, safety, privacy and transparency. We are focused on delivering strong and sustainable performance, with an emphasis on providing high quality service for our customers in this digital age. 13

14 A.2 Underwriting performance The Group s insurance business is predominantly private medical insurance (PMI). The Group also writes small amounts of assistance and income protection business. For Solvency II reporting all insurance business is classified as Medical Expense as other lines of business are not material. The summary of underwriting performance below is presented in accordance with the QRT S Premiums, claims and expenses by line of business (refer to the attached Annex). The principal difference between the information provided on QRT S and information reported in the Group s financial statements, as per the table in section A.1.5, is that that claims handling costs are included within expenses on the QRT, in compliance with Solvency II reporting requirements, but are included in the claims figure in the financial statements. Claims handling costs amounted to 154m for the year ended 31 December In addition, Solvency II reporting requirements exclude amortisation and impairment of intangibles and costs incurred by centre functions. These costs fall within Other in the table in section A1.5. The summary of underwriting performance represents the performance of the Group s wholly owned insurance businesses. Information on the Group s share of profits of equity accounted insurance undertakings is provided in section A Underwriting Performance Premiums: Gross insurance premiums 8,044 Premiums ceded to reinsurers (54) Net insurance premium earned 7,990 Claims: Insurance claims incurred (6,179) Reinsurers share of claims 43 Net insurance claims incurred (6,136) Expenses (1,310) Underwriting profit before investment income 544 In Australia, against the backdrop of slower overall growth in the market, our health insurance business grew to become Australia s largest health insurer for the first time. We achieved a 3% growth in customer numbers at year end, which is the result of our focus on providing enhanced customer service and better value. We believe customer affordability will continue to be an issue for the sector in As a result, we are focused on having a strong say in the national health debate, advocating government policy reform that will deliver a more affordable and efficient health system for all Australians. Our UK health insurance business has performed well, with profit driven by improved corporate and consumer loss ratios. We are committed to our digital transformation and innovating to give our customers access to the best care, with initiatives such as our pioneering breast and bowel cancer self-referral service providing our customers faster access to diagnosis without the need for a GP referral. In 2016, we also launched an expanded cataract network tackling shortfalls in ophthalmology, improving our customers experience. Our intermediary partners are also seeing the benefits of Connect, our user-friendly online portal, which allows them to manage their clients more effectively. In Spain, we achieved good revenue growth in our Sanitas Seguros PMI business as a result of successful partnerships with Santa Lucia and Banco Bilbao Vizcaya Argentaria. We are committed to digitising the entire customer journey through a new version of our Sanitas app, so customers can purchase products on our website, find a doctor and make an appointment, undertake video consultations with our doctors and access their medical histories. Products such as Blua, our health insurance offering, are enhancing the customer experience through direct video consultations. The Isapre insurance business in Chile saw a performance improvement despite difficult market conditions. Our claims programmes and operating cost controls have driven profitability. 14

15 In Hong Kong, we grew our market share in PMI through good growth in revenue and customers, supported by our bancassurance partnership with Hang Seng Bank. Underwriting performance by geographical area 2016 Australia UK Spain Chile Hong Kong Others Net insurance premium earned 3,579 1, ,990 Net insurance claims incurred (2,999) (1,196) (702) (463) (196) (580) (6,136) Expenses (279) (327) (181) (70) (47) (406) (1,310) Underwriting profit/(loss) (29) 544 The information is presented in accordance with the S Premiums, claims and expenses by country QRT. A.3 Investment performance A.3.1 Investment income Investment income for the year, as reported in the Group s financial statements, was as follows: Investment income Interest income: Loans and receivables 41 Investments held to maturity 3 Investments designated as available for sale 1 Investments designated at fair value through profit or loss 3 Net realised gains on financial investments designated at fair value through profit or loss 6 Realised gain on early termination of long term investment 39 Net increase in fair value: Investments designated at fair value through profit or loss 20 Investment property 21 Net foreign exchange translation gains 78 Total investment income 212 A large proportion of the Group s investments are in cash or short-term deposits. The Group has also invested in a limited portfolio of non-cash assets; principally bonds and loans. Hedging instruments are used to manage the foreign exchange risks from non-sterling investments. Included within net realised gains on financial investments designated at fair value through profit or loss and investments designated at fair value through profit or loss is a net gain, after hedging, on the Group s return seeking asset portfolio of 23m. A gain of 39m was recognised on the early termination of the financial investment which provided security against the repayment of the secured loans issued by UK Care No.1 Limited. The 2016 net foreign exchange gain includes a 64m gain on the retranslation of US dollar and sterling investments held in Egypt as a result of a devaluation of the Egyptian pound in November Financial income by Solvency II asset class is presented in the table below. Total

16 Financial income by asset class Government bonds 35 Corporate bonds 22 Investment funds 6 Cash and deposits 132 Mortgages and loans 11 Property 24 Hedging instruments (16) Other investments 2 Total financial income 216 The difference between investment income in the Group s financial statements and Solvency II financial income by asset class relates to gains or losses from non-investment properties which are included in Solvency II financial income but shown under operating income for IFRS. A.3.2 Investment expenses Investment expenses in the year amounted to 3m, covering investment management fees and other costs relating to investment related activities. A.3.3 Gains and losses recognised directly in equity Gains and losses recognised directly in equity for the year, as reported in the consolidated statement of comprehensive income in the financial statements, are as follows: 2016 Gains and losses recognised directly in equity Remeasurement loss on pension schemes (15) Unrealised gains on revaluation of property 64 Foreign exchange translation differences on goodwill 336 Other foreign exchange translation differences 453 Net loss on hedge of net investment in overseas subsidiary companies (87) Change in fair value of underlying derivative of cash flow hedge 2 Reclassification of foreign exchange translation differences to profit or loss on disposal of subsidiary 2 Taxation credit on income and expenses recognised directly in other comprehensive income 13 Total gains and losses recognised directly in equity 768 The remeasurement loss of 15m on pension schemes is due to changes in financial assumptions used in valuing pension schemes assets and liabilities. The fall in market bond yields has reduced the discount used in the valuation of liabilities creating a net actuarial loss. Unrealised gains of 64m on the revaluation of property represent movements in the value of properties, based on external valuations. Foreign exchange gains on goodwill of 336m and other foreign exchange translation differences of 453m are driven by the relative weakening of sterling against the functional currencies of subsidiaries in the Group. The net loss of 87m on hedging of net investment in overseas subsidiaries is driven by losses on euro and Danish krone contracts, as a result of the weakening of sterling against these currencies. A.4 Performance from other activities A.4.1 Revenue from insurance service contracts Contracts entered into by the Group s insurance entities that do not result in the transfer of significant insurance risk to the Group are accounted for as insurance service contracts. These contracts mainly relate to the

17 administration of claims funds on behalf of corporate customers. Revenues from service contracts are recognised as the services are provided. In 2016, revenues from insurance service contracts amounted to 19m. A.4.2 Care, health and other revenue The Group generates income from the operation of its care homes, hospitals, dental centres and other healthcare and wellbeing centres. In 2016, this revenue amounted to 3,039m. A.4.3 Share of post-taxation results of equity accounted investments The Group s share of post-taxation results of equity accounted investments was 30m for the year ended 31 December 2016, comprising a 26m profit from Arabia and an aggregate profit of 4m from other associates and joint ventures. A.4.4 Operating expenses Operating expenses as reported in the Group s financial statements are 4,197m. Operating expenses Staff costs 1,962 Acquisition costs 258 Medical supplies and fees 795 Property costs 182 Operating lease rentals 148 Marketing costs 124 Catering and housekeeping costs 75 Consultancy fees 53 Net loss on foreign exchange transactions 59 Amortisation of intangible assets 120 Impairment of intangible assets 35 Depreciation expense 162 Other operating expenses 224 Total operating expenses 4,197 Operating expenses include 1,170m which relate directly to insurance activities (excluding claims handling costs). The balance of 3,027m represents costs relating to health and care provision activities, amortisation and impairment of intangible assets and costs incurred by centre functions. A.4.5 Other income and charges Other income and charges comprise income or expenses that are related to the investing and divesting activities of the Group Other income and charges Net gain on disposal of businesses 11 Deficit on revaluation of property (31) Write down of property (15) Net loss on disposal of property, plant and equipment (4) Other income and charges (39) The net gain on disposal of businesses includes 13m profit on disposal of Home Healthcare, which was sold to Celesio on 1 July 2016 and 2m loss on liquidation of Middle East Holdings

18 A.4.6 Financial expense Financial expense Interest expense on financial liabilities at amortised cost 86 Finance charges in respect of finance leases 1 Loss on early repayment of debt 152 Other financial expenses 2 Total financial expense 241 A loss of 152m was recognised following the early redemption, in April 2016, of secured loans issued by UK Care No.1 Limited, a Group undertaking. The loss was partially offset by a 39m gain on the early termination of the financial investment which provided security against the secured loans. The 39m gain is recognised in investment income (see section A.3.1 Investment income). A.4.7 Leasing arrangements Information on leasing arrangement is included at section D.3.12 Leasing arrangements. A.5 Any other information There is no other material information to be disclosed

19 B. System of Governance (Unaudited) B.1 General information on the system of governance B.1.1 Association members Board oversight, which in listed companies is normally provided by shareholders, is exercised in by a body of around 100 distinguished AMs. Serving for an initial term of up to 10 years, AMs are drawn mainly from business, public life, the medical professions, the charitable sector and academia. AMs are independent and do not have any claim on the assets of. They do not receive a fee for their service or a share of profits or dividends. At the end of 2016, there were 115 AMs. They are kept informed of s strategy and performance through regular AM briefings and at the Annual General Meeting (AGM). The Group CEO, Chairman and Senior Independent Director are also available to answer questions on an individual basis. AMs views are heard and communicated to the Board and to relevant teams throughout the business. B.1.2 Leadership We aim to operate to the governance standards required of FTSE 100 companies, where appropriate, and the Board closely monitors developments in corporate governance and assesses how these can be applied to. The Board is responsible for the long-term success of the Company. s governance structure is designed to enable the Board to lead within a framework of prudent and effective controls which enables risk to be assessed and managed. In 2016, the Board held eleven full meetings and scheduled four others to discuss specific matters such as the appointment of our Group CEO and major acquisitions requiring approval. The Board devotes its time to overseeing s strategy, the approval of business plans and significant capital expenditure, acquisitions and disposals as well as monitoring business performance. Minutes of all Board and Committee meetings were recorded and reflect the substance of the discussion as well as the decisions made. has a schedule of matters reserved for the Board s approval, which were updated in 2016, and all other items are delegated to the Group CEO. The matters reserved for the Board can be found on bupa.com. The levels of authority delegated to management are regularly reviewed and updated when appropriate. The roles of the Board, the Chairman, the CEO, the Senior Independent Director and the Non-Executive Directors (NEDs) are clearly defined and set out in detail on bupa.com/corporate/about-us/corporate-governance. All Board and Committee members are provided with sufficient resources to undertake their duties, including access to both internal and external specialist advice at s expense. The Directors individually and collectively act in accordance with their duties under the Companies Act has a directors and officers insurance policy in place as well as a deed of indemnification. The Board believe our existing structure is appropriate for the size and complexity of. B.1.3 Board structure, roles and responsibilities Board composition s Board consists primarily of NEDs (eight including the Chairman), who substantially outnumber the Executive Directors (two). The independence of NEDs from management and from any other business or relationship which could materially interfere with their independence is considered and confirmed on an annual basis. All Directors offer themselves for annual re-election by the AMs, save for those retiring at the AGM. Lord Leitch, s Chairman, who was independent on appointment, holds a small number of other appointments, none of which are considered to impede his role at. The Company Secretary performed the annual review of all Directors actual or potential conflicts of interest and all potential conflicts were logged and authorised. Should a conflict arise, the relevant director would agree to 19