Bupa Insurance Limited. Annual Report and Accounts for the financial year ended 31 December 2014

Transcription

1 Annual Report and Accounts for the financial year ended 31 December 2014 Registered Office: Bupa House Bloomsbury Way London WC1A 2BA

2 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

3 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 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 Net premiums earned 2,127.6m 2,126.1m Profit before taxation 182.5m 166.3m Loss ratio 72% 68% Insured lives 000s 1 2,857 2,947 Solvency position (Pillar 1) 2 174% 187% 1 Excludes the Scandinavian business which is in run-off. 2 The 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 1

4 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 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. 2

5 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 highquality, 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 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 3

6 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 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 Bloomsbury Way London WC1A 2BA 3 March 2015 R T Bowden 4

7 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. 5

8 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 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 Bloomsbury Way London WC1A 2BA 3 March 2015 R T Bowden Director 6

9 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 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. 7

10 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 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 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 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. 8

11 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

12 Profit and loss account for the financial year ended 31 December 2014 TECHNICAL ACCOUNT Note 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, ,373 Net operating expenses 4 (449,872) (521,790) Balance on the technical account 162, ,583 NON-TECHNICAL ACCOUNT Balance on the technical account 162, ,583 Investment income 6 38,266 Unrealised gains on investments 9,718 34,692 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, ,314 Taxation on profit on ordinary activities 9 (22,140) (37,531) Profit for the financial year 160, ,783 All profits are derived from continuing operations. The accounting policies and notes on pages 14 to 43 form part of these financial statements. 10

13 Balance sheet as at 31 December 2014 ASSETS Note 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, ,304 Intermediaries Debtors arising out of reinsurance operations 12,200 13,966 Deferred taxation Other debtors 14 42,802 63, , ,563 Cash at bank and in hand , ,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 The accounting policies and notes on pages 14 to 43 form part of these financial statements. 11

14 Balance sheet (continued) as at 31 December 2014 EQUITY and LIABILITIES Note Capital and reserves Called up share capital , ,209 Share premium account 17 68,561 68,561 Revaluation reserve 17 17,756 2,967 Profit and loss reserve , ,453 Total capital and reserves 708,167 1,207,190 Subordinated liabilities , ,000 Gross technical provisions Claims outstanding ,377 Provision for unearned premiums , , ,402 1,177,518 1,232,093 Provisions for other risks 20 11,087 27,114 Deposits received from reinsurers 2, Creditors Creditors arising out of direct insurance operations 16,980 13,522 Creditors arising out of reinsurance operations 6,018 5,899 Other creditors , , , ,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 Director R T Bowden Director The accounting policies and notes on pages 14 to 43 form part of these financial statements. 12

15 Statement of total recognised gains and losses for the financial year ended 31 December 2014 Profit for the financial year 160, ,783 Foreign exchange translation differences (1,333) (1,023) Total recognised gains relating to the financial year 158, ,760 Note of historical cost profits and losses for the financial year ended 31 December 2014 Reported profit on ordinary activities before taxation 182, ,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, ,159 Historical cost profit retained for the financial year after taxation 156, ,628 Reconciliation of movements in shareholders funds for the financial year ended 31 December 2014 Opening shareholders funds 1,207,190 1,079,430 Profit for the financial year 160, ,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 The accounting policies and notes on pages 14 to 43 form part of these financial statements. 13

16 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 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) 14

17 Accounting policies (continued) (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. 15

18 Accounting policies (continued) (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) 16

19 Accounting policies (continued) 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 nontechnical 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) 17

20 Accounting policies (continued) 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. 18