annual report and accounts for the financial year ended 31 .../media/files/site-specific... · 31...

Bupa Insurance Limited

Annual Report and Accounts for the financial year ended

31 December 2014 Registered Office: Bupa House 15 – 19 Bloomsbury Way London WC1A 2BA Registered number: 3956433

Bupa Insurance Limited Registered number: 3956433

Contents

Page Strategic report 1 Directors’ report 65 Statement of Directors' responsibilities 7 Independent auditor’s report to the shareholders of Bupa Insurance Limited 8 Profit and loss account 10 Balance sheet 11 Statement of total recognised gains and losses 13 Note of historical cost profits and losses 13 Reconciliation of movements in shareholders' funds 13 Accounting policies 14 Notes to the financial statements 21


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Strategic report for the financial year ended 31 December 2014

The Directors present their annual report and the financial statements of Bupa Insurance Limited (“the Company”) for the financial year ended 31 December 2014.

Principal activities Bupa Insurance Limited (“the Company”) is the UK’s largest health insurer, with 2.9 million members in the UK; and a leading provider of international health insurance providing medical cover to customers worldwide. The Company provides personal, corporate and small business health insurance, as well as inward reinsurance and ancillary health insurance products, such as cash plans and travel insurance. The Company also has outward reinsurance arrangements in order to manage risk. The principal operations take place in the UK, with further operations in Denmark and branches in Malta, Cyprus, Spain and France. Key performance indicators 2014 2013 Net premiums earned £2,127.6m £2,126.1m Profit before taxation £182.5m £166.3m Loss ratio 72% 68% Insured lives ‘000s1 2,857 2,947 Solvency position (Pillar 1)2 174% 187% 1Excludes the Scandinavian business which is in run-off. 2The solvency position is disclosed in the Company’s PRA return.

Results The Company achieved a 9.7% growth in profit before taxation year on year supported by our focus on improving operational efficiency and gains in net financial income, which was up 125% in the year to £19.6m (2013: £8.7m) driven by strong performance of our investments. The UK health insurance sector continues to be challenging, although during the year we saw customer growth in our SME business and we are beginning to see early signs of growth in our corporate business. In 2014 our corporate customers in the UK domestic business experienced some of the lowest premium increases on record. As a direct result of our work to contain costs, we were able to reduce or hold premiums level for over half our renewing corporate customers. In our International Private Medical Insurance (“IPMI”) business growth in revenue was supported by several major corporate account wins, however we were impacted by higher claims costs on certain large corporate accounts. We have reviewed, re-priced and in some cases decided to discontinue these accounts, whilst also strengthening our claims provision. The regulatory solvency coverage reduced by 13% to 174% (2013: 187%) following the payment of a £672.8m dividend during the year. The dividend was part funded from a partial settlement of the £792.8m loan to Bupa Finance plc, our immediate parent undertaking, which reduced the outstanding balance to £400m. The remainder was funded from deposits with credit institutions. Development We remain committed to meeting our customers’ changing needs and making quality healthcare more affordable and accessible. During 2014, we have continued campaigning to reform the healthcare sector in the UK and drive greater transparency for patients on the cost and quality of private healthcare, as well as better value for money. As part of this we continue our ongoing drive to reduce healthcare costs, including those charged by hospitals, for the benefit of customers. We signed a new long-term agreement with Spire Hospitals, with prices agreed for six years and a framework to further improve quality of care. This


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Strategic report (continued) provides a solid base to address the affordability of private healthcare and we will look to work with others in a similar way going forward. In the IPMI business we saw a continued trend during the year towards mandatory health cover regimes in a number of countries in which we operate around the world. We continue to monitor such developments closely to ensure that our products remain a distinctive, premium and international alternative, addressing more than minimum local cover requirements and providing competitive advantage. We also began the transformation of our IPMI business during the year, as we regionalised our operations to better serve our customers in their own language, culture and time zone, delivering operational efficiencies and focusing on strategic partnerships. In the UK we launched our first range of tiered products – Bupa Global Select, Premier, Elite and Ultimate Health Plans. These products allow customers to tailor their level of cover to their healthcare needs and expectations, with similar propositions to be rolled out in a number of priority markets in 2015. Future Outlook In 2015 we will continue to innovate and develop products and services to meet the changing needs of our customers. In the UK our focus is on growth through making private healthcare more accessible and affordable for more people. We will do this by focusing on operational efficiency and leading sector reform to deliver better value to our customers. We will also launch a three year investment programme, which will include development of new products, services and online tools to respond to our customers changing needs and to engage more people in their health and wellbeing. Our transformation of our IPMI business will also continue in 2015 as we implement our regionalisation strategy, focusing in particular on building our new regions, and we will launch our tiered products in a number of priority markets, including Hong Kong and Mexico, to offer customers greater choice and access to quality healthcare. Principal risks and uncertainties Both the business performance and operations are subject to a number of risks and uncertainties. The Directors consider that the key risks and uncertainties relate to market conditions, insurance risk, regulatory risk and operational risk. Market Conditions The continuing challenging economic conditions, particularly in the UK, are likely to present a challenge to businesses and consumers in the Company’s markets. This could make customer retention, new business acquisition, and profitability more difficult to achieve. The Company has expanded its level of business development monitoring so as to identify adverse trends and manage such risks as effectively as possible. PMI markets are highly competitive with companies seeking to attract customers through new products and additional benefits. There is also demand for innovation to meet the disparate needs of corporate customers and individuals. The Company keeps its competitive position in each of its markets under continuous scrutiny, and regularly reviews strategic and tactical objectives. Performance is monitored by the Board and senior management using operational, financial and other data. Insurance customers benefit from services procured from a wide range of providers including hospitals and consultants. In the face of inflationary pressures, there is a risk that increasing provider charges and medical inflation will lead to substantial increases in premium rates and customer dissatisfaction. The Company’s policy is to work with its providers to maintain and improve quality while managing ‘benefit spend’ - the cost of procuring medical services. This includes, where possible, the use of contracts, preferred supplier arrangements and case management techniques.


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Strategic report (continued) There is a risk of change to healthcare businesses in key markets as a result of political decisions: such change may have positive or adverse consequences for the Company. The Company’s activities are central to many people’s lives and therefore it is inevitable that its services will also be high on political agendas. As part of the strategic planning process, analysis is performed of the impact of possible political change on its business model. The Company also seeks to maintain a constructive dialogue with governments in its main areas of operation, promoting the benefits of high-quality, private healthcare alongside public provision. This risk is also mitigated by the international diversification of its operations. However, the geographic diversification of the Company’s operations and customer base significantly increases its exposure to localised business disruption due to natural or human events. Insurance Risk There is also risk that the frequency, size or timing of claims on insurance policies varies from that expected, leading to variations in financial returns. By virtue of being in the medical insurance business, the Company is exposed to a number of factors affecting its insurance risk, including macroeconomic trends, medical inflation, shifts in demographics, changes in population health, developments in healthcare delivery and technology, catastrophes and statistical fluctuation. Each of these factors could affect product pricing, reserving, claim risk accumulation, as well as the lapse and persistency behaviour of its current and prospective customers. Insurance risks are managed in a variety of ways, including the use of advanced analytic models of products and pricing. In addition, business units operate controls on underwriting and claims settlement as well as utilising internal and external actuarial, business and strategic reviews. A significant mitigating factor is that the vast majority of business written is for short-term risks, which enable regular re-pricing in the event of changes in claims trends. Regulatory Risk The Company seeks to comply with all regulatory standards and to maintain an awareness of, and where possible, anticipate regulatory change. Its principal financial regulators are the UK’s Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), with which the Board and senior managers maintain a close supervisory relationship. The risk that the Company may fail to meet regulatory requirements is mitigated through the effective operation of the governance framework, and in particular the identification and management of all relevant requirements and associated risks Operational Risks The Company has detailed Business Continuity Plans for all businesses with dedicated specialised resource in place to ensure appropriate operation of key processes and controls. Business continuity issues are reported to the Executive Risk Committees of the Company’s business units, with significant issues being escalated to the Company’s Board Risk Committee which is responsible for ensuring appropriate controls are in place to mitigate potential risks. As a result of the governance structures and controls in place, there was no significant impacted business disruption event during 2014. The services provided by the Company are underpinned by information technology systems and infrastructure that enable the delivery of core processes and products. Failure of these systems may reduce the ability of the Company to deliver products and services to its customer base or increase the risk of information security breaches. The Company’s IT services are provided by Bupa Insurance Services Limited, which has a number of dedicated IT teams who are responsible for the development, maintenance and monitoring


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Strategic report (continued) of IT services. A programme of work is in place to ensure the continued development and enhancement of all IT services to provide the levels of services required by the business and adequately protect sensitive customer and business data. Solvency II and regulatory change In the Company we seek to apply both the letter and spirit of new and changing regulation. Solvency II drives a programme of change that goes well beyond pure capital and solvency measures, and we are using this as a catalyst to enhance and embed strong governance and control in the Company. Solvency II will bring a significantly enhanced regulatory regime for European insurers. We support the additional stability and safeguards that the enhancements are intended to bring and will work with the regulator on implementation of the changes to deliver the best outcomes for customers, markets and the Company.

Forthcoming financial reporting requirements In 2012 the Financial Reporting Council (FRC) issued FRSs 100, 101 and 102, which set out the choice of accounting framework applicable in the UK and Republic of Ireland to replace existing UK GAAP. These new standards become effective for accounting periods beginning on or after 1 January 2015. As the Company is a wholly owned subsidiary undertaking of Bupa, a group whose accounts are publicly available and prepared under IFRS, the Company qualifies for application of FRS 101. FRS 101 uses the recognition and measurement bases of IFRS, while allowing exemptions from a number of disclosures required by full IFRS. Adoption of FRS 101 is not expected to have a material impact on the Company. Registered Office: Bupa House 15 – 19 Bloomsbury Way London WC1A 2BA 3 March 2015 R T Bowden


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Directors’ report for the financial year ended 31 December 2014 Results and dividends The profit for the financial year after taxation amounted to £160.3m (2013: £128.8m). During the year the Directors declared total dividends of £672.8m (£1.88 per ordinary share) in respect of the year ended 31 December 2014 (2013: £nil). Impact of Companies (Audit, Investigations and Community Enterprise) Act 2004 As at the date of this report, indemnities are in force under which the Company has agreed to indemnify the Directors, to the extent permitted by law and the Company's Articles of Association, in respect of all losses arising out of, or in connection with, the execution of their powers, duties and responsibilities, as Directors of the Company. Directors Details of the present Directors and any other persons who served as a Director during the financial year are set out below: R T Bowden (Chief Executive) R A Phipps (Chairman) (appointed 1 January 2015) G E Mitchell (Chairman) (resigned 31 December 2014) G K Aslet E B Bourke L Churchill S R Fletcher (resigned 29 April 2014) R A Lang J H Lorimer D V Marmion (resigned 29 April 2014) D J Pollard (resigned 29 April 2014)

The Company Secretary is T Crosier who was appointed 17 September 2014 following the resignation of J P Sanders on the same date.

Employees Details of the number of person’s employed and gross remuneration are contained in note 5 to the financial statements. Every effort is made by the Directors and management to inform, consult and encourage the full involvement of staff on matters concerning them as employees and affecting the Company’s performance.

Employment of disabled persons The Company is committed to providing equal opportunities to employees. The employment of disabled persons is included in this commitment; and the recruitment, training, career development and promotion of disabled persons is based on the aptitudes and abilities of the individual. Should employees become disabled during employment, every effort would be made to continue their employment and, if necessary, appropriate training would be provided. Employment policy The Company continues to regard communication with its employees as a key aspect of its policies. Information is given to employees about employment matters and about the financial and economic factors affecting performance through management channels. Employees are encouraged to discuss operational and strategic issues with their line management and to make suggestions aimed at improving performance.


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Directors’ report (continued) Disclosure of information to auditors The Directors who held office at the date of approval of this Directors’ report confirm that: • so far as that each Director is aware, there is no relevant audit information of which

the Company's auditor is unaware, and • each Director has taken all the steps that ought to have been taken as a Director in

order to be aware of any information needed by the Company's auditors in connection with preparing their report and to establish that the Company's auditor is aware of that information.

This confirmation is given and should be interpreted in accordance with the provisions of Section 418 of the Companies Act 2006. Auditors Pursuant to Section 487 of the Companies Act 2006, the auditor will be deemed to be reappointed and KPMG LLP will therefore continue in office. Registered Office: Bupa House 15 – 19 Bloomsbury Way London WC1A 2BA 3 March 2015 R T Bowden Director


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Statement of Directors' responsibilities for the financial year ended 31 December 2014 The Directors are responsible for preparing the strategic report, Directors' report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period. In preparing these financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • state whether applicable UK Accounting Standards have been followed, subject to

any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate

to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company's transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the company and to prevent and detect fraud and other irregularities. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.


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Independent auditor’s report to the shareholders of Bupa Insurance Limited We have audited the financial statements of Bupa Insurance Limited for the financial year ended 31 December 2014 set out on pages 10 to 43. The financial reporting framework that has been applied in their preparation is applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice). This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and auditors As explained more fully in the statement of Directors’ responsibilities set out on page 7, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate. Opinion on financial statements In our opinion the financial statements: • give a true and fair view of the state of the Company's affairs as at 31 December

2014 and of its profit for the financial year then ended; • have been properly prepared in accordance with UK Generally Accepted Accounting

Practice; and • have been prepared in accordance with the requirements of the Companies Act

2006.

Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Strategic report and in the Directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements.


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Independent auditor’s report to the shareholders of Bupa Insurance Limited (continued) Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept, or returns adequate for our audit

have not been received from branches not visited by us; or • the financial statements are not in agreement with the accounting records and

returns; or • certain disclosures of Directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit.

Karen Orr (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 15 Canada Square London E14 5GL 3 March 2015


The accounting policies and notes on pages 14 to 43 form part of these financial statements.

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Profit and loss account for the financial year ended 31 December 2014

All profits are derived from continuing operations.

2014 2013 TECHNICAL ACCOUNT Note £’000 £’000 Gross premiums written 2 2,217,126 2,298,983 Outward reinsurance premiums (119,250) (193,685) Premiums written, net of reinsurance 2 2,097,876 2,105,298 Change in the gross provision for unearned premiums 19 32,066 (22,193) Reinsurers’ share of change in the gross provision for unearned premiums

(2,355)

42,995

29,711 20,802 Net premiums earned 2 2,127,587 2,126,100 Other technical income net of reinsurance 6,388 5,302 Total technical income 2,133,975 2,131,402 Gross claims paid (1,621,503) (1,597,275) Reinsurers’ share of claims paid 87,848 93,681 Gross claims paid net of reinsurance (1,533,655) (1,503,594) Gross change in the provision for claims 19 15,733 35,132 Reinsurers’ share of change in provision (3,334) 16,433 12,399 51,565 Net claims incurred 2 (1,521,256) (1,452,029) Underwriting contribution 612,719 679,373 Net operating expenses 4 (449,872) (521,790) Balance on the technical account 162,847 157,583 NON-TECHNICAL ACCOUNT Balance on the technical account 162,847 157,583 Investment income 6 38,266 34,692 Unrealised gains on investments 9,718 5,603 Investment expenses 7 (25,246) (23,450) Unrealised losses on investments (3,113) (8,114) Net financial income 19,625 8,731

Profit on ordinary activities before tax 8 182,472 166,314 Taxation on profit on ordinary activities 9 (22,140) (37,531) Profit for the financial year 160,332 128,783



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Balance sheet as at 31 December 2014 2014 2013 ASSETS Note £’000 £’000 Investments Land and buildings 10 54,833 36,407 Investments in subsidiary undertakings 11 2,559 2,559 Financial investments 12 1,252,819 1,798,064 1,310,211 1,837,030 Reinsurers' share of technical provisions Provision for unearned premiums 42,842 43,194 Claims outstanding 12,683 17,702 55,525 60,896 Debtors Debtors arising out of direct insurance operations: Policyholders 566,953 619,304 Intermediaries 929 985 Debtors arising out of reinsurance operations 12,200 13,966 Deferred taxation 13 438 586 Other debtors 14 42,802 63,722 623,322 698,563 Cash at bank and in hand 15 330,112 289,140 Prepayments and accrued income Deferred acquisition costs 50,749 52,841 Other prepayments and accrued income 13,674 12,940 64,423 65,781 Total assets 2,383,593 2,951,410



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Balance sheet (continued) as at 31 December 2014 2014 2013 EQUITY and LIABILITIES Note £’000 £’000 Capital and reserves Called up share capital 16 357,209 357,209 Share premium account 17 68,561 68,561 Revaluation reserve 17 17,756 2,967 Profit and loss reserve 17 264,641 778,453 Total capital and reserves 708,167 1,207,190 Subordinated liabilities 18 330,000 330,000 Gross technical provisions Provision for unearned premiums 19 943,141 982,691 Claims outstanding 19 234,377 249,402 1,177,518 1,232,093 Provisions for other risks 20 11,087 27,114 Deposits received from reinsurers 2,085 162 Creditors Creditors arising out of direct insurance operations 16,980 13,522 Creditors arising out of reinsurance operations 6,018 5,899 Other creditors 21 107,107 106,742 130,105 126,163 Accruals and deferred income 24,631 28,688 Total liabilities 1,675,426 1,744,220 Total equity and liabilities 2,383,593 2,951,410 These financial statements were approved by the Board of Directors on 3 March 2015 and were signed on its behalf by: E B Bourke R T Bowden Director Director



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Statement of total recognised gains and losses for the financial year ended 31 December 2014 2014 2013 £’000 £’000 Profit for the financial year 160,332 128,783 Foreign exchange translation differences (1,333) (1,023) Total recognised gains relating to the financial year 158,999 127,760

Note of historical cost profits and losses for the financial year ended 31 December 2014 2014 2013 £’000 £’000 Reported profit on ordinary activities before taxation 182,472 166,314 Revaluation gain for the year (4,052) - Difference between historical cost depreciation charge and the actual depreciation charge for the financial year

(155) (155)

Historical cost profit on ordinary activities before taxation 178,265 166,159 Historical cost profit retained for the financial year after taxation

156,125 128,628 Reconciliation of movements in shareholders’ funds for the financial year ended 31 December 2014 2014 2013 £’000 £’000 Opening shareholders’ funds 1,207,190 1,079,430 Profit for the financial year 160,332 128,783 Dividend paid in the year (672,811) - Revaluation reserve 14,789 - Foreign exchange translation differences (1,333) (1,023) Net (withdrawal) / addition to shareholders' funds (499,023) 127,760 Closing shareholders' funds 708,167 1,207,190


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Accounting policies for the financial year ended 31 December 2014 The principal accounting policies are summarised below. They have been applied consistently throughout the financial year.

(a) Basis of preparation The financial statements of the Company have been prepared under UK Generally Accepted Accounting Principles (UK GAAP) and the historical cost convention modified to include the revaluation of investments including land and buildings. The financial statements also comply with the appropriate provisions of the Companies Act 2006 and the December 2005 Statement of Recommended Practice (as amended in December 2006) issued by the Association of British Insurers.

The financial statements were approved by the Board of Directors on 3 March 2015. The Directors have reviewed and approved the Company’s accounting policies, which have been applied consistently to all the years presented, unless otherwise stated. The British United Provident Association (Bupa), the ultimate parent undertaking of the Company, has prepared Group accounts in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS). The Company is not required to report under IFRS and therefore these accounts are prepared in accordance with applicable UK accounting standards and the accounting policies are aligned to those of the Bupa Group to the extent that UK GAAP is consistent with IFRS.

The Company's business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic report on pages 1 to 4 and the Directors’ report on pages 5 to 6. The financial position of the Company, its liquidity position and borrowing facilities are described in note 23. In addition, the Directors’ report and notes 22 to 24 to the financial statements include details of the Company's financial instruments; its financial risk management objectives and its exposures to various categories of risk; and its objectives, policies and processes for managing its capital. The financial statements are presented in Sterling, which is the Company’s functional currency. New financial reporting requirements There were no changes to UK GAAP during 2014 that were applicable to the Company. Accounting estimates and judgements The preparation of financial statements in conformity with generally accepted accounting principles requires the use of certain accounting estimates and assumptions that affect the reported assets, liabilities, income and expenses. It also requires the Directors to exercise judgement in applying the Company’s accounting policies. The estimates and assumptions are based on historical experience and other related variables, updated to reflect current trading performance. The estimates and assumptions are reviewed on an ongoing basis and are considered to be appropriate but actual results may differ from these estimates. Judgements made by management in applying the Company’s accounting policies that have a significant effect on the financial statements, and estimates with a significant risk of material adjustment in subsequent periods, are set out below and in more detail in the related notes. • Insurance accounting (note 19) • Property valuations (note 10) • Financial investments (note 12)


Accounting policies (continued)

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(b) Going concern

The Company has sufficient financial resources together with long-term contracts with a number of customers and suppliers across different geographic areas and industries. After making suitable enquiries, the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Strategic report, Directors’ report and financial statements. (c) Exemption from consolidation

The Company is exempt by virtue of Section 400 of the Companies Act 2006 from the requirement to prepare group financial statements. These financial statements present information about the Company as an individual undertaking and not about it as a group. (d) Related party transactions As the Company is a wholly owned subsidiary undertaking of Bupa, a company registered in England and Wales, which publishes consolidated accounts, the Company has pursuant to paragraph 17 of FRS 8: Related Party Disclosure not included details of transactions with other Bupa Group companies which are subsidiary undertakings of the Bupa Group. There were no other related party transactions.

Where the Company enters into financial guarantee contracts to guarantee the indebtedness of other companies within the Group, the Company considers these to be insurance arrangements, and accounts for them as such. In this respect, provision for expected claims is made on an incurred basis. (e) Cash flow statement Under FRS 1: Cash Flow Statements (revised 1996) the Company is exempt from the requirement to prepare a cash flow statement on the grounds it is a wholly owned subsidiary undertaking of Bupa, whose Annual Report and Accounts contain a consolidated cash flow statement for the Bupa Group. (f) Foreign currencies Foreign operations The assets and liabilities of foreign operations held in functional currencies other than Sterling are translated from their functional currency into Sterling at the exchange rate at the balance sheet date. Income and expenses are translated at average rates for the period, provided that the average rate approximates the rates ruling at the date of the transactions. Foreign exchange differences arising on translation are recognised initially in the statement of recognised gains and losses. Foreign transactions Transactions in foreign currencies other than the functional currency of the Company are translated at the rates of exchange ruling at the date of the transaction. Realised exchange differences arising on transactions of foreign currency amounts are recorded in the profit and loss account. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rate ruling at the balance sheet date; the resulting foreign exchange gain or loss is recognised in operating expenses, except where the gain or loss arises on financial assets or liabilities and then it is presented in financial income or expense as appropriate. Non-monetary assets and liabilities denominated in a foreign currency at historic cost are translated using the exchange rate at the date of the transaction; no exchange differences therefore arise. Non-monetary assets and liabilities denominated in a foreign currency at fair value are translated using the exchange rate ruling at the date that the fair value was determined.



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(g) Basis of accounting for underwriting activities Underwriting activities are accounted for on an annual “accident year” basis. Technical Income Technical income arises from insurance contracts entered into with customers. Contracts that result in the transfer of significant risk to the Company are accounted for as general insurance contracts under Part 3 of the ABI SORP section 82 and Appendix C of FRS 26. Income from contracts that do not result in the transfer of significant risk are included in other technical income as required by ABI SORP section 1.5 and Appendix C of FRS 26. Net premiums earned Net premiums earned represent the premiums earned relating to risk exposure for the reported financial year. They comprise gross premiums written, net of reinsurance, adjusted for the change in the gross provision for unearned premiums during the financial year.

The unearned premium provision represents the proportion of premiums written in the financial year that relate to periods of risk in future accounting years.

Premiums are shown gross of commissions payable and net of insurance premium taxes that may apply in certain jurisdictions. Outward reinsurance premiums Outward reinsurance premiums represent the reinsurance premiums payable for contracts entered into that relate to risk mitigation for the reported financial year. These comprise written premiums ceded to reinsurers, adjusted for the reinsurers’ share of the movement in the gross provision for unearned premiums.

In cases where the Company cedes reinsurance for the purpose of limiting its net loss potential, the arrangements do not relieve the Company of its direct obligations under insurance policies written.

Premiums, losses and other amounts relating to reinsurance treaties are recognised over the period from inception of a treaty to expiration of the related business. The actual profit or loss is therefore recognised not at inception but as such profit or loss emerges. Any initial reinsurance commission is recognised on the same basis as the acquisition costs incurred. Net claims incurred Net claims incurred comprises direct insurance claims, net of reinsurance, paid during the financial year, together with the movement in the gross technical provision for claims in the period and the related handling costs. In 2013 the related claims handling costs were included in net operating expenses.

The gross technical provision for claims represents the estimated liability arising from claims episodes in current and preceding financial years which have not yet given rise to claims paid. The provision includes an allowance for claim management and handling expenses. The gross technical provision for claims is estimated based on current information and the ultimate liability may vary as a result of subsequent information and events. Adjustments to the amount of claims provision for prior years are included in the technical account in the financial year in which the change is made.

In setting provisions for claims outstanding, the Company determines best estimate on an undiscounted basis and then adds a margin of prudence, such that there is confidence that future claims will be met from the provisions. The margin of prudence is set at a 75% confidence level.

(g) Basis of accounting for underwriting activities (continued)



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Provision is made for unexpired risks where the claims and administrative expenses likely to arise after the end of the financial year, in respect of contracts commencing before that date, are expected to exceed the related unearned premiums, less related deferred acquisition costs. The methods used and estimates made for claims provisions are reviewed regularly. Reinsurers’ share of claims Reinsurers’ share of claims incurred represents recoveries from reinsurers on claims paid, adjusted for the reinsurers’ share of the change in the gross technical provision for claims. The recoverables due from reinsurers are assessed for impairment at each balance sheet date. Impairments are accounted for within the technical account on an incurred loss basis. Acquisition costs Acquisition costs included within net operating expenses, represent commissions payable and other expenses related to the acquisition of insurance contract revenues written during the financial year. Acquisition costs that have been paid that relate to subsequent periods are deferred and recognised in the technical account across the period in which the benefit has been recognised, on a straight line basis. Other technical income net of reinsurance A number of contracts written by the Company do not result in the transfer of significant insurance risk to the Company. Other technical income, net of reinsurance represents the surplus receivable on such contracts and is recognised as the services are provided (h) Investment income and expenses Investment income comprises interest receivable, realised gains and losses on investments, changes in the fair value of items recognised at fair value through profit and loss, changes in the fair value of derivatives and foreign exchange gains and losses. Interest income except in relation to assets classified as fair value through profit or loss, is recognised in the non-technical account as it accrues, using the effective interest method. Investment expenses include interest payable on borrowings, changes in the fair value of items recognised at fair value through profit and loss, changes in the fair value of derivatives and other investment expenses. Changes in the value of financial assets designated as at fair value through profit or loss are recognised within investment income as an unrealised gain or loss while the asset is held. Upon realisation of these assets, the change in fair value since the last valuation is recognised within investment income as a realised gain or loss. (i) Taxation and deferred taxation The taxation expense on the profit for the year comprises current and deferred taxation. Deferred taxation is provided in full on all timing differences that have originated, but not reversed, at the balance sheet date which result in an obligation to pay more, or a right to pay less or to receive more taxation benefits, with the following exceptions: • Provision is made for taxation on gains arising from the revaluation of property to its

market value, the fair value adjustment of fixed assets, or gains on disposal of fixed assets that have been rolled over into replacement assets, only to the extent that, at the balance sheet date there is a binding agreement to dispose of the assets concerned and without it being possible to claim rollover relief. However, no provision is made where, on the basis of all available evidence at the balance sheet date, it is more likely than not that the taxable gain will be rolled over into replacement assets and charged to tax only where the replacement assets are sold.

(i) Taxation and deferred taxation (continued)



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• Provision is made for deferred taxation that would arise on remittance of the retained earnings of overseas subsidiaries only to the extent that, at the balance sheet date, dividends have been accrued as receivable.

• Deferred taxation assets are recognised only to the extent that it is considered more likely than not that there will be suitable taxable profits from which the underlying timing differences can be deducted.

Deferred taxation is measured on an undiscounted basis at the taxation rates that are expected to apply in the periods in which timing differences reverse, based on current taxation rates and laws. Trading losses surrendered to other Bupa Group subsidiary undertakings are made on a full payment basis. (j) Financial investments The Company has classified its financial investments into the following categories: at fair value through profit or loss, held to maturity and loans and receivables. The Directors determine the classification of all financial investments at initial recognition and when they are recorded at fair value. Financial investments are derecognised when the rights to receive cash flows from the financial investments have expired or where the Company has transferred substantially all risks and rewards of ownership. Financial investments at fair value through profit or loss Financial investments designated at fair value through profit or loss consist of investments or instruments where management makes decisions based upon their fair value. The investments are carried at fair value, with gains and losses arising from changes in this value recognised in the profit and loss account in the period in which they arise. The fair values of quoted investments in active markets are based on current bid prices. Derivatives are held at fair value through profit or loss. Loans and receivables Loans and receivables are non-derivative financial investments with fixed or determinable payments that are not quoted in an active market. They arise when the Company provides money, goods or services directly to a borrower or customer with no intention of trading the receivable. Loans are recognised when cash is advanced to the borrowers. Loans and receivables are carried at amortised cost calculated using the effective interest method, less impairment losses. Held to maturity investments Held to maturity investments are similar to loans and receivables but where the Company has a positive intention and ability to hold investments to maturity. This is assessed at each reporting date. Held to maturity investments are measured at amortised cost using the effective interest method, less any impairment losses. Any discount or premium on purchase is amortised over the life of the investment through the profit and loss account.



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(k) Land and buildings Freehold and leasehold properties comprise offices. These properties are shown at fair value based on periodic, but at least triennial valuations performed by external independent valuers, less subsequent depreciation and impairment losses. The valuations are performed with sufficient regularity to ensure that the carrying value does not differ significantly from fair value at the balance sheet date. Directors’ valuations are performed in interim years where impairment indicators exist. Valuations of office buildings are on a market value basis. Borrowing costs relating to the acquisition or construction of qualifying assets are capitalised as part of the cost of that asset. Gains and losses on revaluation are recognised in the revaluation reserve except where an asset is revalued below historical cost, in which case the deficit is recognised in the profit and loss account. Where a revaluation reverses deficits taken to the profit and loss account in prior years, then it is credited to the profit and loss account. Freehold land, included within freehold or leasehold properties as appropriate, are not appreciated. Depreciation on property is calculated using the straight line method to allocate costs or revalued amount less residual value over estimated useful life as follows. • Freehold land No depreciation • Freehold property 50 years • Leasehold property Over the period of the lease

Impairment reviews are undertaken where there are indications that carrying value of the asset may not be recoverable. An impairment loss on land and buildings carried at cost is recognised in the profit and loss account to reduce the carrying value to the recoverable amount. An impairment loss on land and buildings carried at revalued amount is recognised in the revaluation reserve, except where an asset is revalued below historical cost, in which case the deficit is recognised in the profit and loss account. (l) Investments in subsidiaries Investments in subsidiary undertakings are carried at cost less impairment. (m) Debtors

Debtors, including insurance debtors are carried at amortised cost less impairment losses. (n) Impairment of financial assets

Financial assets comprise financial investments and trade and other debtors. If they are not already held at fair value, financial assets are assessed at each reporting date to determine whether there is any objective evidence that they are impaired. A financial asset is considered impaired if objective evidence indicates that one or more events that have occurred since the initial recognition of the asset have had a negative impact on the estimated future cash flows of that asset. An impairment loss in respect of a financial investment measured at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the effective interest rate at the date the investment was made. Significant financial assets are tested for impairment on an individual basis. All impairment losses are recognised in the profit and loss account. (o) Subordinated liabilities

Subordinated liabilities are stated at amortised cost using the effective interest method. The coupon payable on the loan is recognised as an investment expense.



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(p) Provisions for other risks

A provision is recognised in the balance sheet when the Company has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation that can be reliably estimated. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-taxation rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Although provisions are made where payments can be reliably estimated, the amounts provided are based upon a number of assumptions that are inherently uncertain and therefore the amount that is ultimately paid could differ from the amount recorded. (q) Creditors

Insurance Premium Taxation (IPT) payable is accounted for under the standard ‘cash received’ method and is reported and remitted to HM Revenue & Customs by reference to the date when the premium is paid. In prior years IPT was accounted for using the ‘special accounting scheme’ and was paid in full on the entire written premium at the contract start date. All creditors are carried at amortised cost. (r) Derivative financial instruments

FRS 25 (Financial instruments: presentation) and FRS 26 (Financial instruments: recognition and measurement) and FRS 29 (Financial instruments: disclosures) have been applied as noted below. Derivative financial instruments consist of currency forward contract and swaps. Derivatives are recognised initially at fair value; attributable transaction costs are recognised in the profit or loss account when incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes there in are recognised immediately in the profit and loss account. The value of derivative financial instruments is established using listed market prices. Subsequent to initial recognition, they are re-measured at fair value within other debtors or creditors. The fair value of a financial instrument is defined as the amount at which a financial instrument could be exchanged in an arm’s length transaction between informed and willing parties.


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Notes to the financial statements for the financial year ended 31 December 2014 1. Immediate and ultimate parent company The immediate parent undertaking of the Company is Bupa Finance plc, a company incorporated in England and Wales. The ultimate parent undertaking of the Company, and the largest group into which these financial statements are consolidated, is The British United Provident Association Limited (Bupa), a company incorporated in England and Wales. The smallest group into which these financial statements are consolidated is that headed by Bupa Finance plc. Copies of the accounts of both companies can be obtained from The Registrar of Companies, Cardiff, CF14 3UZ. 2. Analysis of underwriting results (i) Analysis by class

Premiums written

Premiums earned

Claims incurred

£’000 £’000 £’000 2014 Direct insurance: accident and health 2,021,505 2,035,192 (1,393,312) Inward reinsurance 195,621 214,000 (212,458) Outward reinsurance (119,250) (121,605) 84,514 2,097,876 2,127,587 (1,521,256) 2013 Direct insurance: accident and health 2,095,559 2,103,311 (1,426,905) Inward reinsurance 203,424 173,479 (135,238) Outward reinsurance (193,685) (150,690) 110,114 2,105,298 2,126,100 (1,452,029) (ii) Analysis by type Gross premiums written 2014 2013 £’000 £’000 Group 1,107,069 1,090,178 Individual 1,110,057 1,208,805 2,217,126 2,298,983


Notes to the financial statements (continued)

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2. Analysis of underwriting results (continued) (iii) Segmental analysis of gross written premiums

Gross premiums written

Technical account

£’000 £’000 2014 United Kingdom 2,190,715 157,689 Rest of the world 26,411 5,158 2,217,126 162,847 2013 United Kingdom 2,274,375 151,503 Rest of the world 24,608 6,080 2,298,983 157,583 Geographical analysis is based on where the business is written. (iv) Segmental analysis of net assets 2014 2013 £’000 £’000 United Kingdom 689,216 1,190,381 Rest of the world 18,951 16,809 708,167 1,207,190 3. Prior year’s claims provisions The over provisions for claims at the beginning of the year, compared to payments and provisions at the end of the year in respect of prior years claims is £13,808k (2013: £46,022k).

4. Net operating expenses 2014 2013 £’000 £’000 Commission and other acquisition costs 39,379 77,875 Changes in deferred acquisition costs 1,872 (366) Staff costs (see note 5) 4,614 4,705 Net (gain) / loss on foreign exchange transactions (6,037) 3,463 Expenses payable to Bupa Group companies 404,464 440,654 Reinsurers share of expenses (13,855) (17,521) Other operating expenses 19,435 12,980 449,872 521,790 Expenses payable to Bupa Group companies mainly comprises of service fees payable to Bupa Insurance Services Limited, for the provision of insurance mediation and administrative services to the Company.



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5. Staff costs and Directors' remuneration All of the Company’s employees are employed by the Danish business. All other staff are remunerated and employed through the Company’s service company, Bupa Insurance Services Limited. (i) Staff costs The average monthly number of employees was as follows: 2014 2013 74 70 Their aggregate remuneration comprised:

2014 2013 £’000 £’000 Wages and salaries 3,718 3,883 Social security costs 545 502 Pension costs 351 320 4,614 4,705 (ii) Directors’ remuneration 2014 2013 £’000 £’000 Emoluments 2,281 851 Amounts receivable under long-term incentive schemes 539 333 Company contributions to defined contribution pension schemes - - 2,820 1,184 There is 1 (2013: 3) Director who is a member of a defined benefit pension scheme. The remuneration of the highest paid Director was: 2014 2013 £’000 £’000 Emoluments 1,095 555 Amounts receivable under long-term incentive schemes 238 312 1,333 867



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6. Investment income

2014 2013 £’000 £’000 Income from Bupa Group undertakings Interest receivable 12,267 12,520 Rental income 5,936 5,252 Income from deposits with credit institutions 9,944 11,461 Realised capital gains on investments 7,603 5,221 Realised foreign exchange gains on investments 2,516 238 38,266 34,692 7. Investment expenses 2014 2013 £’000 £’000 Interest payable to Bupa Group undertakings 20,625 20,625 Realised foreign exchange losses on investments 795 404 Investment management expenses payable to Bupa Group undertakings 1,451 1,264 Other interest payable 2,375 1,157 25,246 23,450 8. Profit on ordinary activities before taxation Profit on ordinary activities before taxation is stated after charging: 2014 2013 £’000 £’000 Depreciation of land and buildings – owned (415) (416) Net revaluation gain for the year (4,052) - Fees payable to the Company's auditors for the audit of the Company's annual accounts (364) (375) Fees for the audit of the Company represent the amount receivable by the Company's auditors. Fees paid to the Company's auditors, KPMG LLP, and its associates for services other than the statutory audit of the Company are not disclosed in these accounts since the consolidated accounts of Bupa, the ultimate parent undertaking, disclose non-audit fees on a consolidated basis



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9. Taxation on profit on ordinary activities (i) Analysis of taxation charge in the financial year 2014 2013 £’000 £’000 Current tax UK corporation taxation on profit for the financial year 38,275 38,563 Double taxation relief (2,135) (3,102) Foreign taxation on income for the financial year 2,493 2,917 38,633 38,378 Adjustments in respect of prior periods - UK corporation taxation (17,066) (1,105) - Foreign taxation 425 328 Total current taxation 21,992 37,601 Deferred tax Origination and reversal of timing differences 69 146 Changes in taxation rate - 161 Adjustments in respect of prior periods 79 (377) Total deferred taxation 148 (70) Total taxation on profit on ordinary activities 22,140 37,531 The taxation expense of £22.1m (2013: £37.4m) represents a headline effective tax rate of 12.13%. The reduction from 2013 is largely due to the release of prior year tax provisions following the settlement of historical matters, amounting to £16.6m (2013: £0.7m). Excluding the prior year credits, the current year effective tax rate of 21.17% is in line with the UK tax rate for the period of 21.5%. (ii) Factors affecting the taxation charge The differences between the total current taxation charge shown above and the amount calculated by applying the standard rate of UK corporation taxation to the profit before taxation is as follows:

2014 2013 £’000 £’000 Profit on ordinary activities before taxation 182,472 166,314 Taxation on profit on ordinary activities at standard UK corporation taxation rate of 21.5% (2013: 23.25%) 39,219 38,662 Effects of: Fixed asset difference 31 97 Non taxable income (919) - Expenses not deductible for taxation purposes - 76 Transfer pricing adjustment (71) (79) Accelerated capital allowances (37) (35) Deferred taxation on short-term and other timing differences (37) (135) Other permanent timing differences 89 - Foreign exchange on timing differences - (23) Different taxation rates on foreign jurisdictions 358 (185) Adjustments to taxation charge in respect of prior periods (16,641) (777) Total current taxation charge for the year 21,992 37,601



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10. Land and buildings Freehold

property- Land

Freehold property- Buildings

Long leasehold

property Total 2014 £’000 £’000 £’000 £’000 Cost or valuation At beginning of year 16,400 20,600 168 37,168 Revaluation 13,000 5,000 (143) 17,857 At end of year 29,400 25,600 25 55,025 Depreciation At beginning of year - (740) (21) (761) Charge for the year - (412) (3) (415) Revaluation - 960 24 984 At end of year - (192) - (192) Net book value at end of year 29,400 25,408 25 54,833 Net book value at beginning of year 16,400 19,860 147 36,407 Historical cost of the Company’s revalued assets 2014 2013 £’000 £’000 Historical cost of revalued assets 43,571 43,571 Accumulated depreciation based on historical cost (7,792) (7,377) Historical cost net book value 35,779 36,194 Of the historical cost of £43.6m, £43.2m relates to freehold property, and £0.4m relates to leasehold property. The Company’s properties are held at fair value based on periodic but at least triennial, valuations performed by external independent valuers, less subsequent depreciation and impairment losses. The valuations are performed with sufficient regularity to ensure that the carrying value does not differ significantly from fair value at the balance sheet date. Two of the Company’s properties were revalued on 30 November 2014. These valuations were carried out independently by Knight Frank, Chartered Surveyors using an Existing Use Value basis of valuation in accordance with the requirements of the RICS Valuation Professional Standards (incorporating the International Valuation Standards). The valuer's opinion of Existing Use Value was primarily derived using comparable recent market transactions on arm's length terms and using appropriate valuation techniques including both Market and Income approaches



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11. Investments in subsidiary undertakings 2014 2013 £’000 £’000 At beginning of year 2,559 1,476 Addition - 1,083 At end of year 2,559 2,559 The investment in subsidiary undertaking, relates solely to Bupa Insurance (Bolivia) SA, an insurance company incorporated in Bolivia, in which the Company holds a 100% investment of ordinary shares. There has been no impairment to date on the investment held in this subsidiary. 12. Financial investments Carrying Carrying

value Fair Value value Fair Value 2014 2014 2013 2013 £'000 £'000 £'000 £'000

Non-current Designated at fair value through the profit or loss Debt securities – corporate bonds 154,129 154,129 105,253 105,253 Debt securities – government bonds 78,108 78,108 - - Shares and other variable yield securities 54,938 54,939 138,275 138,275 Held to maturity Medium term notes 30,000 30,575 50,000 50,120 Loans and receivables at amortised cost Deposits with credit institutions 70,000 71,330 90,000 93,453 387,175 389,081 383,528 387,101 Current Designated at fair value through the profit or loss Shares and other variable yield securities 34,737 34,737 24,544 24,544 Held to maturity Medium term notes 180,907 182,716 150,196 150,196 Loans and receivables at amortised cost Loans to Bupa Group undertakings 400,000 400,000 792,811 794,097 Deposits with credit institutions 250,000 250,460 446,985 452,712 865,644 867,913 1,414,536 1,421,549 Total 1,252,819 1,256,994 1,798,064 1,808,650



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12. Financial investments (continued) The financial investments shown above comprise: Carrying Carrying

Value Value 2014 2013 £'000 £'000

Listed investments 89,675 162,819 Unlisted investments 843,144 1,098,260 Deposits with credit institutions 320,000 536,985 Total 1,252,819 1,798,064 13. Deferred taxation The movement for the financial year in the net deferred taxation asset is as follows: 2014

£’000 2013 £’000

At beginning of year 586 516 (Charged) / credited to profit and loss account (148) 70 At end of year 438 586 Net deferred taxation asset is analysed as follows:

2014 2013 £’000 £’000 Depreciation in excess of capital allowances claimed 119 154 Other timing differences 319 432 Deferred taxation 438 586 14. Other debtors 2014 2013 £’000 £’000 Corporation tax receivable 22,604 - Insurance premium taxation recoverable - 26,876 Trade debtors 57 653 Amounts owed by Bupa Group undertakings 10,847 12,083 Other debtors 8,232 22,939 Derivative assets 1,062 1,171 42,802 63,722 The carrying value of debtors is a reasonable approximation of the fair value.



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15. Cash at bank and in hand 2014 2013 £’000 £’000 Cash at bank and in hand 329,059 288,436 Restricted access deposits 1,053 704 330,112 289,140 The restricted access deposits of £1.1m (2013: £0.7m) relate to claims funds held on behalf of corporate customers. These amounts may be used only to discharge those obligations and potential liabilities if and when they crystallise. 16. Called up share capital 2014 2013 £’000 £’000 Allotted, called up and fully paid 357,208,702 ordinary shares of £1 each 357,209 357,209 17. Reserves

Share capital

account

Share premium account

Revaluation reserve

Profit and loss reserve Total

2014 £’000 £’000 £’000 £’000 £’000 At beginning of year 357,209 68,561 2,967 778,453 1,207,190 Profit for the year - - - 160,332 160,332 Dividend paid in the year - - - (672,811) (672,811) Foreign exchange - - - (1,333) (1,333) Revaluation of property - - 14,789 - 14,789 At end of year 357,209 68,561 17,756 264,641 708,167

Share

capital account

Share premium account

Revaluation

reserve

Profit and loss reserve Total

2013 £’000 £’000 £’000 £’000 £’000 At beginning of year 357,209 68,561 2,967 650,693 1,079,430 Profit for the year - - - 128,783 128,783 Foreign exchange - - - (1,023) (1,023) At end of year year 357,209 68,561 2,967 778,453 1,207,190



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18. Subordinated liabilities 2014 2013 £’000 £’000 Subordinated loan 330,000 330,000 The Company has a £330,000,000 subordinated loan from Bupa Finance plc (the Lender). The loan has no fixed repayment date but is callable on 16 September 2020. Interest is payable at the following rates: • At 6.25% p.a. to the first call date of 16 September 2020. • Subsequently at a rate per annum which is determined by the Lender to be the

aggregate of 1.725% and the gross redemption yield of the benchmark gilt in respect of that reset interest calculation period.

In the event of the winding up of the Company, the claims of the Lender are subordinated in right of payment to the claims of the other creditors of the Company. The fair value of the subordinated loan is £330m (2013: £330m). 19. Gross technical provisions Provision for

unearned premiums

Claims outstanding Total

2014 £’000 £’000 £’000 At beginning of year 982,691 249,402 1,232,093 Direct movement in the provision (13,470) (21,250) (34,720) Reinsurance movement in the provision (18,596) 5,517 (13,079) Foreign exchange (7,484) 708 (6,776) At end of year 943,141 234,377 1,177,518 Provision for

unearned premiums

Claims outstanding Total

2013 £’000 £’000 £’000 At beginning of year 960,436 284,779 1,245,215 Direct movement in the provision (7,750) (54,178) (61,928) Reinsurance movement in the provision 29,943 19,046 48,989 Foreign exchange 62 (245) (183) At end of year 982,691 249,402 1,232,093 Estimation techniques are used in the calculation of the claims outstanding which are valued at a point estimate. The claims outstanding comprises of the estimated costs of claims and claims handling expense for the two claims components as follows: • Claims reported but not paid • Claims incurred but not reported (IBNR)

Claims reported but not paid are computed from direct data extraction from claims administration and accounting systems.



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19. Gross technical provisions (continued) For IBNR the method of computation is based upon the development of previously settled claims and the extrapolation of payments to date for each prior month. The extrapolation methods used are recognised methods described in the Institute and Faculty of Actuaries Claims Reserving Manual (1997). Additional industry accepted refinements are made to allow for, but not limited to, the treatment of large claims, claim seasonality, claim inflation and currency conversions. The aim of these assumptions is to arrive at the best estimate of future obligations and cash outflows of the Company. A margin for adverse deviation is reflected within the estimates. While there is some diversity in the claims development profile across the Company, the Company’s general insurance contracts principally relate to healthcare benefits that occur with stable frequencies and exhibit very short development patterns that can be characterised in months rather than years. Insurance provisions are estimates and as such actual experience may vary, primarily as a result of claims or administration expenses being greater than expected.

20. Provisions for other risks Regulatory Other Total 2014 £’000 £’000 £’000 At beginning of year 2,556 24,558 27,114 Charged to profit and loss account 2,077 11,567 13,644 Utilisation of provision (1,649) (25,217) (26,866) Released in year (46) (2,757) (2,803) Foreign exchange - (2) (2) At end of year 2,938 8,149 11,087 Regulatory Other Total 2013 £’000 £’000 £’000 At beginning of year 4,520 6,233 10,753 Charged to profit and loss account 4,396 21,358 25,754 Utilisation of provision (2,738) (1,741) (4,479) Released in year (3,622) (1,376) (4,998) Foreign exchange - 84 84 At end of year 2,556 24,558 27,114 Regulatory provisions relate to levies payable to the PRA and the FCA. Such levies are generally determined on a capped percentage of revenues basis. Payments are normally made annually, although the frequency may be increased or decreased at the discretion of the regulatory body. Other provisions relate principally to possible IPT payments and legal, contract and customer remediation provisions. The provision for possible IPT payments of £2.6m (2013: £2.6m) relates to countries where there is a potential IPT exposure but the regulations in the country do not oblige the Company to pay IPT, therefore uncertainty exists around the timing of potential payments. Legal provisions of £0.4m (2013: £0.3m) relate to potential and on-going legal claims, and represent the discounted fair value of the total estimated liabilities. Due to the nature of these provisions, the timing and potential cost is uncertain. Contract provisions relate of £4.2m (2013: nil) relate to potential payments to customers under profit share contracts.



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20. Provisions for other risks (continued) Customer remediation provisions of £0.6m (2013: £21.0m) relate to the costs of compensating customers for losses or damages associated with a failure to comply with regulations or to treat customers fairly. Due to the nature of these provisions, the timing and potential cost is uncertain. 21. Other creditors 2014 2013 £’000 £’000 Amounts owed to Bupa Group undertakings 68,085 54,643 Insurance premium taxation payable 16,146 23,787 Corporation taxation payable - 5,659 Trade creditors 791 537 Accrued interest 6,046 6,045 Other creditors 16,039 16,071 107,107 106,742 The carrying value of other creditors is a reasonable approximation of the fair value. 22. Financial instruments Fair value of financial instruments The fair value of a financial instrument is defined as the amount at which a financial instrument could be exchanged in an arm’s length transaction between informed and willing parties. The fair value of the Company’s financial instruments are calculated based on quoted prices at the balance sheet date, or discounted expected future principal and interest cash flows. Financial instruments carried at fair value are measured using different valuation methods categorised into a 3 level hierarchy. The different levels have been defined by reference to the lowest level input that is significant to the fair value measurement, as follows: • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; • Level 2: inputs other than quoted prices include within level 1 that are observable for the

assets or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and • Level 3: inputs for the asset or liability that are not based on observable market data

(unobservable inputs).



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22. Financial instruments (continued)

An analysis is as follows: Level 1 Level 2 Level 3 2014 £’000 £’000 £’000 Shares and other variable yield securities 89,676 - - Debt securities – corporate bonds - 154,129 - Debt securities – government bonds - 78,108 - Medium term notes - 213,291 - Deposits with credit institutions - 321,790 - Loans to Bupa Group undertakings - 400,000 - Derivative assets - 1,062 - Level 1 Level 2 Level 3 2013 £’000 £’000 £’000 Shares and other variable yield securities 162,819 - - Debt securities – corporate bonds - 105,253 - Medium term notes - 200,316 - Deposits with credit institutions - 546,165 - Loans to Bupa Group undertakings - 794,097 - Derivative assets - 1,171 - 23. Risk management The Directors are responsible for identifying, evaluating and managing risks faced by the Company and considers the acceptable level of risk, the likelihood of these risks materialising, how to reduce the risk and the cost of operating particular controls relative to the benefit from managing the related risks. Bupa operates the three lines of defence model. 1. Business management is responsible for the identification and assessment of risks and controls. 2. Risk functions together with risk policy owners provide support and challenge the completeness and accuracy of risk assessments and the adequacy of mitigation plans. 3. Internal audit provides independent and objective assurance on the robustness of the risk management framework, and the appropriateness and effectiveness of internal controls. The principal significant risks of the Company and how they are mitigated are described on pages 2 to 4. The Company has adopted a risk management strategy that endeavours to mitigate these risks, which is approved by the Board. In managing these exposures, the Treasury and Investment Committee reviews and monitors any significant investment and market risks. The Company has exposure to a number of risks from its use of financial instruments and risks associated with its insurance business. These have been categorised into the following types of risk, and details of the nature, extent and how the Company has managed these risks is described below: 1. Insurance risk 2. Market risk 3. Credit risk 4. Liquidity risk



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23. Risk management (continued) 23.1 Insurance Risk Underwriting, pricing and claims risk Underwriting risk affects future cash flows of the Company. It can be subdivided into claims risk and pricing risk which represent the risk of adverse variances in claims outflows and premium inflows respectively. Pricing risk arises from routine revisions to premium tariffs and from the processes, in certain businesses, to set bespoke premiums for large corporate health insurance customers. The adequacy of pricing rests on thorough actuarial analyses of past and most recent claims levels, combined with forward projections of the most recent observed trends. Pricing risk affects only future cash flows since new tariffs impact on levels of premium earned when health insurance contracts renew. In the Company, the dominant product style is of an annually renewable health insurance contract. The annual renewability feature permits tariff revisions to be made in response to changes in claim experience. This is a significant mitigant to pricing risk. The Company underwrites no material business that commits it to cover risks at premiums fixed beyond a twelve month period from inception or renewal. Claims risk is managed and controlled by means of pre-authorisation of claims, outpatient benefit limits, the use of consultant networks and agreed networks of hospitals and charges. Specific claims management processes vary across the Company depending on local conditions and practice. Future adverse claims experience, for example, which is caused by external factors such as medical inflation, will affect cash flows after the date of the financial statements. Generally, the Company’s health insurance contracts contain terms and conditions that provide for the reimbursement of incurred medical expenses for treatment related to acute medical conditions. The contracts do not provide for capital sums or indemnified amounts. Therefore claims experience is necessarily underpinned by prevailing rates of illness. Additionally, claims risk is generally mitigated by the Company running control processes to ensure that both the treatments and the consequent reimbursements are appropriate. Reserving risk Reserving risk is the risk that technical provisions for claims incurred prove to be insufficient in light of later events and claims experience. There is a relatively low exposure to reserving risk due to the short-term nature of claims development patterns. The short-tail nature of the Company’s insurance contracts means that movements in claims development assumptions are generally not significant. The development patterns are kept under constant review to maintain the validity of the assumptions and hence, the validity of the estimation of recognised technical provisions. The amount of claims provision at any given time that relates to potential claims payments that have not been resolved within one year is not material. Also, of the small provisions that do relate to longer than one year, it is possible to predict with reasonable confidence the outstanding amounts.



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23. Risk management (continued) Other risks related to underwriting health insurance business Claims provisions are not discounted and their short-term nature means that changes in interest rates have no impact on reserving risk. In addition, the future premium income and claims outflows of health insurance premium liabilities are unaffected by changes in interest rates. None of the Company’s insurance contracts contain embedded derivatives so the contracts do not in that respect give rise to interest rate risk. The Company is exposed to foreign currency risk through some claims which are settled in a local currency. Where possible these liabilities are matched to assets in the relevant currency to provide an economic hedge to this exposure. The majority of the Company’s activities are single line health portfolios. Even though only one line of business is involved, the Company does not have significant concentrations of insurance risk for the following reasons: • product diversity between domestic and expatriate, and individual and corporate health

insurance; and • a variety of claims type exposures across diverse medical providers - consultants, nursing

staff, clinics, individual hospitals and hospital groups. Only in select circumstances does the Company use reinsurance. Reinsurance contracts give rise to credit risk as disclosed in note 23.3. Geographical concentrations of risk The Company is exposed to the risk that a single event occurs in a location which would result in a large number of claims arising under a group risk policy. This is mitigated by diversifying the Company’s portfolio of risk across several countries. Catastrophe risk Either a natural disaster, such as the spread of an epidemic, or a manmade disaster could lead to a large number of claims and thus higher than expected claims costs. Such risks are reduced by quota share and excess of loss cover by the Bupa Group and external providers. The Bupa Group’s risk management and actuarial functions oversee these arrangements. 23.2 Market risk Market risk is the risk of adverse financial impact due to changes in fair values of future cash flows of financial instruments from fluctuations in interest rates, foreign exchange rates, commodity prices, credit spread and equity prices. The focus of the Company’s long-term financial strategy is to facilitate growth without undue balance sheet risk. The Investment Committee is responsible for the management of the Company’s liquidity and short-term borrowings, together with the risks arising on interest rates and foreign currencies and to protect the security of the Company’s financial investments. The Company actively manages price risk by ensuring that the majority of its cash and investments are held with highly rated credit institutions.



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23. Risk management (continued) Where the Company has moved away from straight money market investments and invested in a limited portfolio of absolute return assets (principally corporate bonds), the Company uses a value at risk analysis (VaR95) to quantify, taking account of asset volatility and correlation between asset classes. This portfolio was £291.5m at 31 December 2014 (2013: £250.2m) and the 1 year VaR95 figure attributable to the portfolio is £21.7m at 31 December 2014 (2013: £23.5m). Foreign exchange risk The Company is exposed to foreign exchange risks arising from commercial transactions and from recognising assets, liabilities and investments in overseas operations. The Company is exposed to both transaction and translation risk. The former is the risk that a company’s cash flows and realised profits may be impacted by movements in foreign exchange rates. The latter arises from translating the financial statements of foreign operations into the Company’s functional currency. Key exposures are to the US Dollar and Euro. The Company uses forward currency contracts to hedge foreign exchange exposure to the US Dollar and Euro. These forward contracts were entered into throughout 2014 and hedge a portion of forecast foreign currency cash flows. They are accounted for on a fair value basis under FRS 26. A US Dollar translation exposure of £4.4m ($6.8m) (2013: £40.7m ($65.1m)) and a Euro translation exposure of £79.4m (€102.3m) (2013: £80.1m (€96.1m)) arise from foreign currency operations within the Company’s US Dollar and Euro books of business that are part of the expatriate business. The Company also entered into forward currency contracts with a view to fully hedging the foreign portion of the return seeking asset portfolio. The value of the hedges are adjusted to reflect the most recent valuations of the investment. As at 31 December 2014 the notional value of these hedges was US Dollars of £87.4m ($136.2m) and Euro of £77.5m (€99.8m). The carrying value of total assets and total liabilities categorised by currency is as follows: 2014 2013 £’000 £’000 Euro 79,450 80,054 US Dollar 4,370 40,746 Danish Krone 5,022 2,776 Swiss Franc (2,484) (3,440) Australian Dollars (544) (396) Total foreign currency denominated net assets 85,814 119,740



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23. Risk management (continued) The rates used by the Company were the same as those applied across the Group and the following exchange rates applied during the financial year: Average rate Closing rate 2014 2013 2014 2013 US Dollar 1.6475 1.5647 1.5581 1.6566 Euro 1.2411 1.1775 1.2877 1.2014 Danish Krone 9.2514 8.7817 9.5871 8.9623 Australian Dollar 1.8265 1.6228 1.9082 1.8557 Swiss Franc 1.5071 1.4493 1.5485 1.4721 The impact of a hypothetical 10% strengthening (weakening) of Sterling (2013 : 10%) against the currencies below, with all other variables constant, would have (decreased) / increased profit before taxation and reserves by the amounts shown below: Strengthening 10% Weakening 10%

(Losses)/gains included in profit and loss account

£’000

(Losses)/gains included in

reserves

£’000

Gains/(losses) included in profit and loss account

£’000

Gains/(losses) included in

reserves

£’000 2014 US Dollar (2,424) 7,549 2,963 (9,227) Euro 1,688 797 (2,063) (974) Danish Krone (529) (457) 647 558 Australian Dollars (121) 49 148 (60) Total sensitivity (1,386) 7,938 1,695 (9,703) 2013 US Dollar (5,817) 1,811 7,110 (2,213) Euro 2,342 1,063 (2,863) (1,299) Danish Krone (640) (252) 782 308 Australian Dollars (96) 36 118 (44) Total sensitivity (4,211) 2,658 5,147 (3,158) Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is exposed to interest rate risk arising from fluctuations in market rates. This affects both the return on floating rate assets, the cost of floating rate liabilities and the balance sheet value of its investment in fixed rate bonds. Floating rate assets represent a natural hedge for floating rate liabilities. The net balance on which the Company was exposed as at 31 December 2014 was £1,183.2m (2013: £1,550.0m). The Company’s sole interest bearing financial liability is the £330.0m subordinated debt (see note 18). This is a fixed interest liability which has no repayment date, however the interest rate is due to be reset in 2020. The impact of a hypothetical rise of 100 bps (2013: 100 bps) in interest rates at the reporting date, on an annualised basis, would have increased profit and reserves by £1.6m (2013: £13.7m). This analysis assumes that all other variables, in particular foreign exchange rates, remain constant. The impact of a hypothetical fall of 100 bps (2013: 100bps) in interest rates on an annualised basis would have the inverse effect to that stated in the previous paragraph.



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23. Risk management (continued) 23.3 Credit risk Credit risk is that the Company will suffer a financial loss as a result of a counterparty failing to meet all or part of their contractual obligations. Group Treasury manages the Company’s credit risk under the guidance of the Investment Committee. Investment exposure with external counterparties is managed by ensuring there is a sufficient spread of investments and that all counterparties are rated at least A by two of the three key rating agencies used by the Company (unless specifically approved by the Investment Committee). The Company has no direct exposure to peripheral Eurozone sovereign debt, however there may be small holdings within the Company’s portfolio of return seeking assets. The investment profile at 31 December is as follows: 2014

£’000 2013

£’000 Investment grade counterparties 1,447,983 1,968,361 Non-investment grade counterparties 134,948 118,843 Total 1,582,931 2,087,204 Investment grade counterparties include cash at bank and in hand of £322.6m (2013: £270.6m). The investments which are held with non-investment grade counterparties are classed as shares & other variable yield securities. Non-investment grade counterparties are those rated below BBB-. Information regarding the ageing of financial investments, assets arising from insurance operations, and the value of the impairment made against these assets, is provided below:



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23. Risk management (continued) 2014 Neither

past due or

impaired

0-3 months

3-6 months

6 months- 1year

Greater than 1

year

Impairment Total carrying

value

£’000 £’000 £’000 £’000 £’000 £’000 £’000 Debt securities 232,237 - - - - - 232,237 Shares and other ..variable yield ..securities 89,675 - - - - - 89,675 Medium term notes 210,907 - - - - - 210,907 Loans to Bupa Group undertakings 400,000 - - - - - 400,000 Deposits with credit ..institutions 320,000 - - - - - 320,000 Reinsurer’s share of ..technical provisions 55,525 - - - - - 55,525 Cash in bank and at hand 330,112 - - - - - 330,112 Debtors arising out ..of insurance ..operations 552,584 26,169 3,344 537 434 (2,986) 580,082 Amounts owed by Bupa Group undertakings 10,847 - - - - - 10,847 Other debtors 9,035 281 33 2 - - 9,351 Total 2,210,922 26,450 3,377 539 434 (2,986) 2,238,736 2013 Neither

past due or

impaired

0-3 months

3-6 months

6 months- 1year

Greater than 1

year

Impairment Total carrying

value

£’000 £’000 £’000 £’000 £’000 £’000 £’000 Debt securities 105,253 - - - - - 105,253 Shares and other ..variable yield ..securities 162,819 - - - - - 162,819 Medium term notes 200,196 - - - - - 200,196 Loans to Bupa Group undertakings 792,811 - - - - - 792,811 Deposits with credit ..institutions 536,985 - - - - - 536,985 Reinsurer’s share of ..technical provisions 60,896 - - - - - 60,896 Cash in bank and at hand 289,140 - - - - - 289,140 Debtors arising out ..of insurance ..operations 558,830 41,953 28,882 7,255 1,395 (3,999) 634,316 Amounts owed by Bupa Group undertakings 12,037 - - - - - 12,037 Other debtors 23,532 485 48 119 579 - 24,763 Total 2,742,499 42,438 28,930 7,374 1,974 (3,999) 2,819,216 The carrying amount of the financial investments and assets arising from insurance operations shown above of £2,238.7m (2013: £2,819.2m) included on the balance sheet, represents the maximum credit exposure.



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23. Risk management (continued) The movement in the allowance for impairment in respect of financial investments and assets arising from insurance operations during the year was as follows: 2014 2013 £’000 £’000 At beginning of year 4,062 7,476 Impairment loss recognised in year 953 986 Bad debt provision released in year (2,047) (4,480) Foreign exchange 18 80 At end of year 2,986 4,062 23.4 Liquidity risk Liquidity risk is the risk that the Company will not have available funds to meet its liabilities when they fall due. The Company enjoys a strong liquidity position and adheres to strict liquidity management policies as set by its Investment Committee as well as adhering to certain liquidity parameters, as defined by the PRA. Liquidity is managed by currency and by considering the segregation of accounts required for regulatory purposes. Short-term operational working capital requirements are met by cash in hand and committed bank facilities. The contractual maturities of financial liabilities and the expected maturities of other liabilities including estimated interest payments of the Company as at 31 December are as follows: 2014 Subordinated

liabilities Gross

technical provisions

Creditors arising out

of direct insurance

operations

Other creditors

Total

£’000 £’000 £’000 £’000 £’000 2015 20,625 1,177,518 16,980 107,107 1,322,230 2016 20,625 - - - 20,625 2017 20,625 - - - 20,625 2018 20,625 - - - 20,625 2019 20,625 - - - 20,625 2020-2024 344,635 - - - 344,635 After 2024 - - - - - Total 447,760 1,177,518 16,980 107,107 1,749,365 Carrying value in the balance sheet 330,000 1,177,518 16,980 107,107 1,631,605



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23. Risk management (continued) 2013 Subordinated

liabilities Gross technical

provisions Creditors

arising out of direct

insurance operations

Other creditors

Total

£’000 £’000 £’000 £’000 £’000 2014 20,625 1,230,222 13,522 147,998 1,412,367 2015 20,625 1,871 - - 22,496 2016 20,625 - - - 20,625 2017 20,625 - - - 20,625 2018 20,625 - - - 20,625 2019-2023 365,260 - - - 365,260 After 2023 - - - - - Total 468,385 1,232,093 13,522 147,998 1,861,998 Carrying value in the balance sheet 330,000 1,232,093 13,522 147,998 1,723,613 The Company manages investment liquidity against a target benchmark of four months’ duration for deposits with financial institutions and takes actions around this target based on future market expectations. The maturity profile of financial assets at 31 December is as follows: 2014 Cash Deposits

with credit institutions

Loans to Bupa

Group under

takings

Medium term

notes

Debt securities

Shares and other

variable yield

securities

Total

£’000 £’000 £’000 £’000 £’000 £’000 £’000 2015 330,112 250,000 400,000 180,907 - 34,737 1,195,756 2016 - 70,000 - 30,000 232,237 54,938 387,175 2017 - - - - - - - 2018 - - - - - - - 2019 - - - - - - - 2020-2024 - - - - - - - After 2024 - - - - - - - Total 330,112 320,000 400,000 210,907 232,237 89,675 1,582,931 2013 Cash Deposits

with credit institutions

Loans to Bupa

Group under

takings

Medium term

notes

Debt securities

Shares and other

variable yield

securities

Total

£’000 £’000 £’000 £’000 £’000 £’000 £’000 2014 289,140 446,985 792,811 150,196 - 24,544 1,703,676 2015 - 90,000 - 50,000 105,253 138,275 383,528 2016 - - - - - - - 2017 - - - - - - - 2018 - - - - - - - 2019-2023 - - - - - - - After 2023 - - - - - - - Total 289,140 536,985 792,811 200,196 105,253 162,819 2,087,204



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24. Capital management The Company’s capital management objective is to maintain sufficient capital to protect the interests of all of its customers, investors, regulator and trading partners while also efficiently deploying capital and managing risk to sustain ongoing business development. The Company aims to operate within a targeted range for solvency ratios designed to support an investment grade rating from both Moody’s and Fitch. The Company is regulated by the UK’s Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). The PRA requires that the Company must maintain regulatory capital resources in excess of its minimum capital requirements (MCR), imposed by the PRA through its Prudential Sourcebook (PSB). When assessing the Company’s compliance with its capital requirement, the PSB requires that the Company values and credits towards its net asset position only those assets that meet certain criteria on admissibility, concentration limits and counterparty exposure limits. The Company’s £330m perpetual debt, although accounted for as subordinated liabilities in these financial statements, is managed as though it were capital for regulatory purposes. The Company complied with all externally imposed capital requirements during the current and prior financial year. It is the Board’s policy that the Company maintains sufficient eligible capital to meet 150% of its minimal capital requirements and sufficient eligible capital such that the profitability of breaching the Individual Capital Assessment (ICA) will be no more than 1-in-15 in any 12-month period. At 31 December 2014 the Company’s regulatory capital resources were £637.2m (2013: £704.7m), which was in excess of the MCR of £365.6m (2013: £376.1m). This represented a solvency coverage ratio of 174% (2013: 187%). This is disclosed in the Company’s PRA return. The Company has a number of internal processes to ensure compliance with its capital requirements. These include requiring that significant future capital expenditure and growth initiatives be approved by the Board, either as standalone projects or as part of the budgeting and forecasting exercises. The Investment Committee must approve any change to financial investment strategy. Strategic developments and acquisitions over a de minimis amount affecting the Company’s capital require Board authorisation. The Board regularly receives reports on the Company’s capital position, as well as any constraints, risks or uncertainties about this position. The Company reports on regulatory capital resources to the PRA, reporting its estimated solvency position on a monthly basis, and also its audited solvency position at the financial year end.



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24. Capital management (continued) There have been no changes to what is managed as capital or the Company’s capital management objectives, policies or procedures during the year.

25. Contingent liabilities, guarantees and other financial commitments (i) Contingent liabilities The Company in the normal course of business is in various discussions with its regulator. No material adverse impact on the financial position of the Company is expected to arise from these discussions. (ii) Guarantees On 15 December 2004, Bupa Finance plc issued £330m callable subordinated perpetual guaranteed bonds on the London Stock Exchange. Bupa Insurance Limited acted as the guarantor in the issue, irrevocably guaranteeing the bond on a subordinated basis. (iii) Financial commitments The Company had no financial commitments at the balance sheet date.

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