1.  Accounting policies

The following are the principal accounting policies of the Group which are consistent with those of the previous years. The financial statements are prepared in accordance and comply with South African Statements of Generally Accepted Accounting Practice. The financial statements are prepared under the historical cost convention as modified by the revaluation of investments and properties.

1.1 Basis of consolidation
The consolidated financial statements include the Company and its subsidiaries. The results of the subsidiaries are included from the effective dates of acquisition to the effective dates of disposal. Subsidiary undertakings, which are those companies in which the Group, directly or indirectly, has an interest of more than one half of the voting rights or otherwise has power to exercise control over the operations, have been consolidated. All inter-company transactions, balances and unrealised surpluses and deficits on transactions between group companies have been eliminated. Where necessary, accounting policies for subsidiaries have been changed to ensure consistency with the policies adopted by the Group. Separate disclosure is made of minority interests in the financial statements.

1.2 Foreign currencies
Foreign currency assets and liabilities, including those of foreign subsidiaries, are translated to South African Rand at rates of exchange approximating those ruling at year-end. Revenue items are converted at appropriate rates ruling at the time of the respective transactions. Revenue and expenditure of foreign subsidiaries are translated at the weighted average rates for the year. Translation gains and losses on transactions are included in the income statement as incurred and differences arising on consolidation of foreign entities are taken to shareholders’ equity.

1.3 Underwriting results
The underwriting results are determined as follows:

Local premiums are recorded from inception of risk. Full allowance is made for unearned premiums and outstanding claims and the methods used to determine these provisions are set out hereunder. Actual expenses and commissions are recognised as incurred.

Claims on insurance contracts are payable on a claims-occurrence basis. The Group is liable for all insured events that occurred during the term of the contract.

1.4 Insurance cell transactions
Alternate risk transfer business conducted through insurance cells is included in the income statement where sufficient insurance risk transfer is evidenced. Taxed profits attributable to cell owners in respect of insurance risk business are separately disclosed in the income statement. Where there is inadequate risk transfer, the transactions are accounted for as financial instruments and fair valued through the income statement.

1.5 Unearned premiums
Unearned premiums, which represent the proportion of premiums written in the current year which relate to risks that have not expired by the end of the financial year, are calculated on the 365th basis.

1.6 Outstanding claims
The estimated cost of claims includes direct expenses to be incurred in settling claims, net of the expected subrogation value and other recoveries. The Group takes all reasonable steps to ensure that it has appropriate information regarding its claims exposures. However, given the uncertainty in establishing claims provisions, it is likely that the final outcome will prove to be different from the original liability established. The liability for these contracts comprises a provision for claims Incurred But Not Reported (IBNR), a provision for reported claims not yet paid and a provision for unexpired risks at the balance sheet date.

In calculating the estimated cost of outstanding claims (both reported and not), the Group estimation techniques are based upon the actual claims experience using predetermined formulae.

The estimation of IBNR is generally subject to a greater degree of uncertainty than the estimation of the cost of settling claims already notified to the Group, where information about the claim event is available. IBNR claims may not be apparent to the insured until after the event that gave rise to the claim has happened.

In estimating the liability for the cost of reported claims not yet paid the Group considers any information available from loss adjusters and information on the cost of settling claims with similar characteristics in previous periods. Large claims are assessed on a case-by-case basis or projected separately in order to allow for the possible distortive effect of their development and incidence on the rest of the portfolio.

1.7 Property, plant and equipment and depreciation
Motor vehicles, furniture, office equipment, computer equipment and systems are stated at cost less accumulated depreciation. Depreciation is provided on a straight line basis at rates required to write off the costs of these assets over their estimated useful lives. Except for furniture depreciated over ten years, all other classes of assets are depreciated over five years.

Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount.

Gains and losses on disposals are determined by comparing proceeds with carrying amount and are included in operating profit. When revalued assets are sold, the amounts included in fair value reserves are transferred to retained earnings.

1.8 Investments
Investments are classified as trading, held-to-maturity or available-for-sale. The classification is dependent on the purpose for which the investment is acquired and is determined at the time of purchase and re-evaluated on a regular basis. Investments acquired principally for the purpose of generating a profit from short-term fluctuations in price are classified as trading investments and included in current assets. Investments with a fixed maturity that are held with the intent and ability to hold to maturity are classified as held-to-maturity and are included in non-current assets. Investments intended to be held for an indefinite period of time and which may be sold in response to needs for liquidity, changes in interest rates or market conditions are classified as available-for-sale and are included in non-current assets.

Interest bearing staff housing and other loans are classified as originated loans.

(a) Valuation
Purchases and sales of investments are recognised on the trade date, which is the date of commitment to purchase or sell the asset. Cost of purchase includes transaction costs. Trading and available-for-sale investments are subsequently carried at fair value. Held-to-maturity investments are carried at amortised cost, using the effective interest rate method.

Market values for listed securities are calculated with reference to quoted bid prices. Unlisted securities are carried at Directors’ valuations which are based on net asset value and refined based on the specific circumstances of the issuer.

Unrealised gains and losses on revaluation of investments to market value are credited or charged to Net Changes In Available-For-Sale Investments except in the case of trading investments where the gains and losses are credited or charged to the income statement. Gains and losses on disposal of investments are determined as the difference between the sale proceeds and the cost. Originated loans are recognised at the values of the outstanding loan amounts payable.

(b) Income
Interest on investments is accounted for on the accrual basis. Dividends are brought to account as at the last day for registration in respect of listed shares and when declared in respect of unlisted shares.

(c) Associated companies
Associated companies are those in which the Group has a long term interest and over which it exercises significant influence but not control. Significant influence is defined as the ability to participate in the financial and operating policies and decisions of the investee, but not control those policies.

The Group’s share of the post acquisition profits less losses is not accounted for on the equity basis in the Group income statement and balance sheet as the amounts involved are not material. The investments are valued at Directors’ valuation, being the Group’s share of the value of the associates, based on the market values of the underlying investments or properties.

(d) Investment properties
Investment properties are held to earn rental income and appreciate in capital value. Investment properties are treated as long term investments and are carried at market value, determined annually by external independent valuers. Investment properties are not subject to depreciation. Increases and decreases in their carrying amounts are included in net profit or loss for the year.

The market value of the investment properties is based on the best price reasonably obtainable by a willing seller and the most advantageous price reasonably obtainable by a purchaser, which value reflects the actual market state and circumstances as at the balance sheet date.

1.9 Leases
Leases of assets under which the lessor effectively retains all the risks and benefits of ownership are classified as operating leases. Payments made under operating leases are charged to the income statement over the period of the lease.

When an operating lease is terminated before the lease period has expired, any payment that is required to be made to the lessor by way of penalty is recognised as an expense in the period in which termination takes place.

1.10 Taxation
(a) Current taxation
Taxation is provided at current rates on the net operating income for the year after taking into account disallowable expenditure and dividends received and other income not subject to taxation.

(b) Deferred taxation
Deferred income tax is provided, using the liability method, for all temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. Currently enacted tax rates are used to determine deferred income tax. Where the calculation gives rise to a debit balance, the deferred taxation asset is created only if future realisation is assured beyond reasonable doubt.

1.11 Pension obligations
The Group operates a defined benefit pension fund in South Africa for all employees except for non-qualifying employees who are members of the provident fund. Both funds are in South Africa and are governed by the Pension Funds Act. In Botswana, employees are members of a defined benefit scheme operated by the Botswana Insurance Pension Fund. In Zimbabwe, all employees are members of a defined contribution pension fund.

Current contributions to the pension funds and provident fund are charged to income as incurred.

A defined benefit plan is a pension plan that defines an amount of pension benefit to be provided, usually as a function of one or more factors such as age, years of service, or compensation.

The liability in respect of defined pension plans is the present value of the defined benefit obligation at the balance sheet date minus the fair value of plan assets, together with adjustments for actuarial gains and losses and past service cost. The defined benefit obligation is calculated by independent actuaries using the projected unit credit method. The present value of the defined obligation is determined by the estimated future cash outflows using interest rates of Government securities that have terms to maturity approximating the terms of the related liability.

Actuarial gains and losses arising from experience adjustments, changes in actuarial assumptions, and amendments to pension plans are charged or credited to income over the average remaining service lives of the related employees except in the case of retired employees, when such amounts are recognised immediately.

A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees benefits relating to employee service in the current and prior periods.

For defined contribution plans, the Company pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual, or voluntary basis. Once the contributions have been paid, the Company has no further payment obligations. The regular contributions constitute net periodic costs for the year in which they are due, and as such are included in staff costs.

1.12 Long-term incentive compensation programmes
Executive Directors and members of the executive management committee qualify for the long-term incentive compensation programmes of Zurich Financial Services. The programmes comprise a combination of share options under the Global Share Option Plan and the right to receive performance-based share awards linked to sustained financial performance over a three-year period under the Zurich Financial Services Long-Term Performance Share Plan. The Managing Director is a member of both these schemes and the other executives are members of the Long-Term Performance Share Plan. Please refer to note 17 for details.

1.13 Post retirement obligations
The Company provides for post retirement health care benefits for current and future pensioners. The entitlement to post retirement health care benefits is based on the employee remaining in service up to retirement age. Members who were employed after 30 September 2002 are not eligible for the post retirement subsidy of health care. The expected costs of these benefits are accrued over the period of employment, using the projected unit credit method. Independent qualified actuaries carry out valuations of these obligations.

Unrecognised gains and losses in excess of 10% of the accrued liability as prescribed in AC116 are accounted for over the remaining working life of the active employees.

1.14 Statutory contingency reserve
The annual adjustment to the statutory contingency reserve account for premium increases or decreases during the year is reflected as an appropriation to or from retained earnings.

1.15 Provisions
Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made.

1.16 Financial instruments
Financial instruments carried on the balance sheet include cash and bank balances, investments, receivables and payments. The particular recognition methods adopted are disclosed in the individual policy statements associated with each item.

1.17 Receivables
Receivables are carried at anticipated realisable value. An estimate is made for doubtful receivables based on a review of amounts outstanding at year-end.

Bad debts are written off in the year in which they are identified.

1.18 Cash and cash equivalents
For the purpose of the cash flow statement, cash and cash equivalents comprise cash in hand, deposits held at call with banks and investments in money market instruments.

1.19 Segment information
The primary basis for identifying business segments of the Group is to group together related products and services with similar business risks and returns while the secondary basis reflects geographic regions.