Notes to the Annual Financial Statements

for the year ended 31 December 2006

1 Accounting Policies

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and its interpretations issued by the International Accounting Standards Board (IASB) that are effective at 31 December 2006.

1.1

Basis of preparation

The financial statements are prepared under the historical cost convention as modified by the revaluation of investment properties, financial assets and financial liabilities at fair value through income and available-for-sale financial assets. Some employee benefits have been calculated using the projected unit credit method.

The Group has adopted the following mandatory amendments to International Financial Reporting Standards, which are effective for accounting periods beginning on or after 1 January 2006:

(a)

Amendments to published standards effective in 2006

The following amendments to published standards are mandatory for the Group’s accounting periods beginning on or after 1 January 2006:

–

IAS 19 (Amendment), Employee Benefits. This amendment introduces the option of an alternative recognition approach for actuarial gains or losses. It will impose additional recognition requirements for multi-employer plans where insufficient information is available to apply defined benefit accounting. It also adds new disclosure requirements. As the Group does not intend to change the accounting policy adopted for recognition of actuarial gains and losses and does not participate in any multi-employer plans, adoption of this amendment only impacts the format and extent of the disclosure presented in the accounts.

–

IAS 39 (Amendment), The Fair Value Option. This amendment restricts the possibility for the Group to designate financial instruments at fair value through income that are not held for trading or derivatives. The designation of an instrument to be measured at fair value is now possible when it removes or significantly reduces accounting mismatches in measurement or presentation, or where financial instruments are managed and their performance is evaluated on a fair value basis. The Group was able to continue to measure at fair value through income all financial instruments that it had previously designated at fair value through income because it met the conditions for designation. The Group’s designation basis are explained in Note 1.8.

(b)

Amendments to standards effective in 2006 but not relevant to the Group’s operations

The following standards, amendments and interpretations to published standards are mandatory for the accounting periods beginning on or after 1 January 2006, but they are not relevant to the Group’s operations:
–	IAS 21 (Amendment), Net Investment in a Foreign Operation;
–	IAS 39 (Amendment), Cash Flow Hedge Accounting of Forecast Intragroup Transactions;
–	IAS 39 and IFRS 4 (Amendment), Financial Guarantee Contracts;
–	IFRS 6, Exploration for and Evaluation of Mineral Resources;
–	IFRS 1 (Amendment), First-time Adoption of International Financial Reporting Standards;
–	IFRS 6 (Amendment), Exploration for and Evaluation of Mineral Resources;
–	IFRIC 4, Determining whether an Arrangement contains a Lease;
–	IFRIC 5, Rights to Interest Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds; and
–	IFRIC 6, Liabilities Arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment.

(c)

New standards and interpretations to published standards that are not yet effective and have not been early adopted by the Group

The following new interpretations to existing standards have been published that are mandatory for the Group’s accounting periods beginning on or after 1 January 2007 or later periods but that the Group has not early adopted:

–

IFRS 7, Financial Instruments: Disclosures, and a complementary Amendment to IAS 1, Presentation of Financial Statements – Capital Disclosures. IFRS 7 introduces new disclosures relating to financial instruments. It does not have any impact on the classification and valuation of the Group’s financial instruments.

–

IFRS 8, Operating Segments. This standard should be applied to all annual periods commencing on or after
1 January 2009. The standard requires an entity to report financial and descriptive information about its reportable segments. Reportable segments are operating segments or aggregations of operating segments based on information provided to key management. The statement will therefore not impact the results of the Group but may impact the identification and measurement of segment results.

–

IFRIC 7, Applying the Restatement Approach under IAS 29, Financial Reporting in Hyperinflationary Economies (effective from 1 March 2006). IFRIC 7 provides guidance on how to apply requirements of IAS 29 in a reporting period in which an entity identifies the existence of hyperinflation in the economy of its functional currency, when the economy was not hyperinflationary in the prior period. The impact of the adoption of this statement is not expected to be significant to the Group’s financial statements.

–

IFRIC 8, Scope of IFRS 2 (effective from annual periods beginning on or after 1 May 2006). IFRIC 8 requires consideration of transactions involving the issuance of equity instruments – where the identifiable consideration received is less than the fair value of the equity instruments issued – to establish whether or not they fall within the scope of IFRS 2. The Group will apply IFRIC 8 from 1 January 2007, the impact of this adoption is discussed in note 32.

–

IFRIC 10, Interim Financial Reporting and Impairment (effective for annual periods beginning on or after
1 November 2006). IFRIC 10 prohibits the impairment losses recognised in an interim period on goodwill and investments in equity instruments and in financial assets carried at cost to be reversed at a subsequent balance sheet date. The Group will apply IFRIC 10 from 1 January 2007 but is not expected to have any impact on the Group’s financial statements.

–

IFRIC 11, IFRS 2, Group and Treasury Share Transactions. This interpretation should be applied to annual periods commencing on or after 1 March 2007. IFRIC 11 provides guidance on applying IFRS 2 in three circumstances:

*	Share-based payments involving an entity’s own equity instruments in which the entity chooses or is required to buy its own equity instruments (treasury shares) to settle the share-based payment obligation should always be accounted for as equity-settled share-based transactions under IFRS 2.
*	If a parent grants rights to its equity instruments to employees of its subsidiary and assuming the transaction is accounted for as equity-settled in the consolidated financial statements, the subsidiary must measure the services received using the requirements for equity-settled transactions in IFRS 2, and must recognise a corresponding increase in equity as a contribution from the parent.
*	If a subsidiary grants rights to equity instruments of its parent to its employees, the subsidiary accounts for the transaction as a cash-based payment transaction.

(d)

Interpretations to published standards that are not yet effective and not relevant to the Group’s operations

–	IFRIC 9, Reassessment of Embedded Derivatives (effective from annual periods beginning on or after 1 June 2006). IFRIC 9 requires an entity to assess whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative when the entity first becomes party to the contract. Subsequent reassessment is prohibited unless there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment is required. Where the Group has embedded derivatives these are contained within insurance contract liabilities which are measured in terms of IFRS 4 and are unaffected by this interpretation.
–	IFRIC 12, Service Concession Arrangements. This interpretation should be applied to all annual periods commencing on or after 1 January 2008. Service concession arrangements are those arrangements whereby a government or other body grants contracts for the supply of public services such as roads, energy distribution, prisons or hospitals to private operators. The objective of this IFRIC is to clarify how certain aspects of existing IASB literature are to be applied to service concession arrangements. This statement is not applicable to the business of the Group.

Estimates and assumptions

The preparation of the financial statements in conformity with IFRS requires management to make estimates and assumptions in the valuation of certain assets and liabilities. This is specifically true for the valuation of liabilities from insurance contracts. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be relevant under the circumstances. Actual results may, however, differ from these estimates. Revisions to accounting estimates and assumptions are recognised in the year in which the estimate is revised.

The accounting policies set out below have been applied consistently.

1.2

Basis of consolidation

Subsidiaries

The consolidated financial statements include the Company and its subsidiaries. The results of the subsidiaries are included from the effective dates of control up to the effective dates that control ceases. Subsidiaries are those entities for which the Company, directly or indirectly, has the power to govern the financial and operating policies of the entity so as to obtain benefits from its activities.

The Group uses the purchase method of accounting to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the costs of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement.

The results of the subsidiaries are included from the date on which control is transferred to the Group (effective date of acquisition) and are no longer included from the date that control ceases (effective date of disposal). Investments in subsidiaries are measured at cost in the Company’s financial statements.

Foreign subsidiaries in hyperinflationary economies

Foreign subsidiaries which operate in a hyperinflationary economy are adjusted for hyperinflation using a general purchasing power of the local currency in which the accounts are prepared as required by IAS 29. This is in particular applicable to the Group’s investment in the Zimbabwean subsidiary. The restatement is based on the conversion factors derived from the Zimbabwe Consumer Price Index compiled by the Zimbabwe Central Statistical Office. The following indices and factors were applied:

Date	Indices	Conversion factor
31 December 2006	665,790.3	1.0000
31 December 2005	48,205.6	13.8115
31 December 2004	7,028.7	94.7245

Transactions and minority interests

The Group applies a policy of treating transactions with minority interests as transactions with parties external to the Group. Disposals to minority interests result in gains and losses for the Group that are recorded in the income statement. Purchases from minority interests result in goodwill, being the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary.

Associated companies

Associated companies are those entities in which the Group has significant influence, but not control, over the financial and operating policies. This is generally indicated by a voting right in the Company of between 20 and 50%. The consolidated financial statements include the Group’s share of the associate using an equity accounted basis, from the date that significant influence commences until the date that significant influence ceases.

The Group’s share of its associates’ post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate.

Investments in associates are initially measured at cost in the Company level financial statements.

Transactions eliminated on consolidation

The accounting policies have been applied consistently by Group entities. All inter-company transactions, balances and unrealised gains and losses on transactions between Group entities have been eliminated. Unrealised gains arising from transactions with associates are eliminated to the extent of the Group’s interest in the entity. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

1.3

Foreign currencies

Functional and presentation currency

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (functional currency). The consolidated financial statements are presented in thousands of Rands, which is the Group’s presentation currency.

Transactions and balances

Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to South African Rand at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to Rand at foreign exchange rates ruling at the dates the fair value was determined and are reported as part of the fair value gain or loss.

Group companies

The assets and liabilities of foreign entities, including goodwill and fair value adjustments arising on consolidation, are translated to Rand at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of foreign entity are translated to Rand at rates approximating the foreign exchange rates ruling at the dates of the transactions. Foreign exchange differences arising as a result of the aforementioned are recognised directly in a separate component of equity. On disposal the exchange gain or loss will be recognised in the disposal result in the income statement.

1.4

Classification of insurance and investment contracts

The Group issues contracts that transfer insurance risk or financial risk or both. Contracts under which the Group accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder or other beneficiary if a specified uncertain future event (the insured event) adversely affects the policyholder, are classified as insurance contracts. Insurance risk is risk other than financial risk. Financial risk is the risk of a possible future change in one or more of a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract. Insurance contracts may also transfer some financial risk.

Contracts under which the transfer of insurance risk to the Group from the policyholder is not significant are classified as investment contracts.

Cell captive business

Policies written under third party cells transfer insurance risk in terms of IFRS 4, Insurance Contracts and are accounted for in terms of the policy for the recognition of insurance contracts below. A liability in the balance sheet represents the amounts payable to cell shareholders and includes the cash component of assets due to the cell shareholders, which is included in cash and cash equivalents on the balance sheet.

Policies written under first party cells which do not transfer sufficient insurance risk are accounted for in terms of the investment contracts accounting policy below.

Primary risk policies

Primary risk policies where the net positive result of the policy becomes available to the policyholder on termination of the policy are treated as insurance contracts, if they transfer significant insurance risk, with amounts due to policyholders from underwriting and investment income reflected as an expense in the income statement and as a liability in the balance sheet where these amounts have not been paid to the policyholder.

1.5

Recognition and measurement of insurance contracts

The insurance contracts that the Group underwrites are classified and described in note 1.4.

Insurance premium revenue

Insurance premium revenue comprises the premiums on contracts entered into during the year, irrespective of whether they relate in whole or in part to a later accounting period and are disclosed gross of commission payable to intermediaries. Insurance premium revenue written include adjustments to premiums written in prior accounting periods and estimates for ‘pipeline insurance premium revenue’.

Premiums are earned from the date the risk attaches, over the indemnity period, based on the pattern of the risk underwritten. 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 a basis that best represents the unearned risk profile for the underlying business.

Premiums received under third party cell captive business are included in gross premium revenue in the income statement. These premiums are subsequently ceded to insurance cells and are reflected as such in the income statement.

Claims

Claims paid consist of claims and claims handling expenses paid during the financial year and together with the movement in the provision for outstanding claims are recognised in the income statement.

The provision for outstanding claims comprises the Group’s estimate of the undiscounted ultimate cost of settling all claims incurred but unpaid at the balance sheet date whether reported or not and related internal and external claims handling expenses. Related anticipated reinsurance recoveries are disclosed separately as assets. These estimated reinsurance and other recoveries are assessed in a manner similar to the assessment of claims outstanding.

Adjustments to the amounts of claims provisions established in prior years are reflected in the financial statements for the period in which the adjustments are made. Liabilities for unpaid claims are estimated using the input of assessments for individual cases reported to the Group and statistical analyses including an implicit risk margin to allow for the ultimate cost of claims incurred but not reported, and to estimate the expected ultimate cost of more complex claims that may be a affected by external factors such as court rulings.

Claims paid and the movement in the provision for outstanding claims under third party cell captive business are included in the income statement. These claims are reinsured to insurance cells and are reflected as such in the income statement.

Salvage and subrogation reimbursements

Some insurance contracts permit the Group to sell (usually damaged) property acquired in settling a claim (i.e. salvage). The Group might also have the right to pursue third parties for the payment of some or all costs (i.e. subrogation).

Estimates of salvage recoveries are included as an allowance in the measurement of the insurance liability for claims, and salvage property is recognised in other assets when the liability is settled. The allowance is the amount that can reasonably be recovered from the disposal of the property.

Subrogation recoveries are considered as an allowance in the measurement of the insurance liability for claims and are only recognised when the claim is completed. The allowance is the amount that can be recovered from the action against the liable third party.

Unexpired risk provision

Provision is made for unexpired risks where the expected value of claims and expenses attributable to the unexpired periods of policies in force at the balance sheet date exceeds the unearned premiums provision in relation to such policies after the deduction of any deferred acquisition costs. The provision for unexpired risks is calculated separately by reference to classes of business that are managed together, after taking into account the relevant investment returns.

Liability adequacy test

The unexpired risk provision meets the criteria of the liability adequacy test required by IFRS 4 and therefore no additional test is performed.

Reinsurance

The Group cedes reinsurance in the normal course of business for the purpose of limiting its net loss exposure. Reinsurance arrangements do not relieve the Group from its direct obligations to its policyholders.

Only contracts that give rise to a significant transfer of insurance risk are accounted for as reinsurance. Amounts recoverable under such contracts are recognised in the same year as the related claim. Contracts that do not transfer significant insurance risk (i.e. financial reinsurance) are accounted for as financial assets.

The benefits to which the Group is entitled under its reinsurance contracts held are recognised as reinsurance assets. These assets consist of short-term balances due from reinsurers as well as longer-term receivables that are dependent on the expected claims and benefits arising under the related reinsured insurance contracts. Amounts recoverable from or due to reinsurers are measured consistently with the amounts associated with the reinsured insurance contracts and in accordance with the terms of each reinsurance contract. Reinsurance liabilities are primarily premiums payable for reinsurance contracts and are recognised as an expense when due.

Outward reinsurance premiums are recognised as an expense in accordance with the pattern of indemnity received.

Amounts recoverable under reinsurance contracts are assessed for impairment at each balance sheet date. Such assets are deemed impaired if there is objective evidence, as a result of an event that occurred after its initial recognition, that the Group may not recover all amounts due and that there is a reliably measurable impact on the amounts that the Group will receive from the reinsurer. Impairment losses are recognised in the income statement.

Insurance receivables and payables

Receivables and payables are recognised when due. These include amounts due to and from agents, brokers and insurance contract holders.

If there is objective evidence that the insurance receivable is impaired, the Group reduces the carrying amount of the insurance receivable accordingly and recognises that impairment loss in the income statement. The Group gathers the objective evidence that an insurance receivable is impaired using the same process adopted for financial assets at amortised cost. The impairment loss is also calculated under the same method used for these financial assets.

Deferred acquisition costs

The costs of acquiring new and renewal insurance business are capitalised as an intangible asset. Deferred acquisition costs are amortised on a pro rata basis over the contract term as premium is earned.

1.6

Investment contracts

Receipts and payments under investment contracts are not classified as insurance transactions in the income statement but are deposit accounted in the balance sheet. The deposit liability recognised in the balance sheet represents the expected amounts payable to the holders of the investment contracts inclusive of allocated investment income.

1.7

Property and equipment

Motor vehicles, furniture, office equipment, computer equipment and systems are stated at cost less accumulated depreciation and impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is provided on a straight-line basis at rates required to write off the costs of fixed assets over their estimated useful lives to their estimated residual values. Computer equipment and systems are depreciated over three years, motor vehicles and office equipment over five years and furniture over ten years.

Repairs and maintenance costs are charged to the income statement as incurred. Subsequent costs are included in the carrying amount or recognised as a separate asset only when it is probable that future economic benefits associated with the item will flow to the Group and the cost can be reliably measured.

Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. The residual values and useful lives are reviewed at each balance sheet date and adjusted if appropriate.

Gains and losses on disposals, which are included in operating profit, are determined by comparing the proceeds with the carrying amounts.

1.8

Investments

Classification

The financial assets are classified into three categories, depending on the purpose for which the assets were acquired. The categories are financial assets at fair value through income, available-for-sale and loans and receivables.

Financial assets at fair value through income

Financial assets at fair value through income are financial assets, which on initial recognition, are designated by the Group as being at fair value through income. A financial asset is classified into this category at inception if acquired principally for the purpose of selling in the short-term, if it forms part of a portfolio of financial assets in which there is evidence of short-term profit-taking, or if so designated by management. This classification is irrevocable until such time as the financial asset is realised. Financial assets designated as at fair value through income at inception are those that are:

–

Held in internal funds to match insurance and investment contract liabilities that are linked to the changes in fair value of these assets. The designation of these assets to be at fair value through income eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an “accounting mismatch”) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them, on different bases.

–

Managed and whose performance is evaluated on a fair value basis. Information about these financial assets is provided internally on a fair value basis to the Group’s key management personnel. The Group’s investment strategy is to invest in equity and debt securities and to evaluate them with reference to their fair values. Assets that are part of these portfolios are designated upon initial recognition at fair value through income.

Available-for-sale financial assets

Available-for-sale financial assets are non-derivative financial assets that are designated in this category or are not classified in any other category and are 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.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market other than those that the Group intends to sell in the short-term or that it may have designated as held at fair value through income or available-for-sale. Interest-bearing staff housing loans and other loans are included in this category. Receivables arising from insurance contracts are also classified in this category.

Recognition

Purchases of investments are recognised on the trade date, which is the date of commitment to purchase the asset. Investments are derecognised when contractual rights to receive cash flows from the assets expire, or where the assets, together with substantially all the risks and rewards of ownership, have been transferred.

Measurement

Financial assets are initially measured at fair values plus, in the case of all financial assets not at fair value through income, transaction costs that are directly attributable to their acquisition. In the case of financial assets through income transaction costs are expensed in the income statement.

After initial recognition, the Group measures investments at fair value through income and available-for-sale financial assets at fair value, without any deduction for transaction costs it may incur on disposal. The fair value of listed investments is their quoted bid prices at the balance sheet date. For unlisted investments the Group establishes fair values by using valuation techniques. These include the use of recent arm’s length market transactions, references to another instrument that is substantially the same, discounted cash flow analysis and option pricing models making maximum use of market inputs. If the fair value of equity instruments cannot be reliably measured, they are measured at cost.

Loans and receivables are measured at amortised cost using the effective interest method.

Realised gains and losses, and unrealised gains and losses arising from changes in the fair value of financial assets at fair value through income, are included in the profit or loss in the period in which they arise.

Unrealised gains and losses arising from changes in the fair value of available-for-sale financial assets are recognised directly in equity except for impairment losses. When available-for-sale financial assets are sold or impaired, the cumulative gains or losses previously recognised in equity are recognised in profit or loss.

Changes in fair value of monetary securities denominated in a foreign currency and classified as available-for-sale are analysed between translation differences resulting from changes in the amortised cost of the security and other changes in the carrying amount of the security. The translation differences on monetary securities are recognised in income. Translation differences on non-monetary securities are recognised in equity. Changes in the fair value of monetary and non-monetary securities classified as available-for-sale are recognised in equity.

1.9

Impairment

Financial assets at amortised cost

The carrying amounts of the Group’s assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the carrying value is reduced to the estimated recoverable amount by means of a charge to the income statement.

Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the Group about the following events:

–	Significant financial difficulty of the issuer or debtor;
–	A breach of contract, such as a default or delinquency in payments;
–	It becoming probable that the issuer or debtor will enter bankruptcy or other financial reorganisation;
–	The disappearance of an active market for that financial asset because of financial difficulties; or
–	Observable data indicating that there is a measurable decrease in the estimated future cash flow from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group, including:
	*	Adverse changes in the payment status of issuers or debtors in the group; or
	*	National or local economic conditions that correlate with defaults on the assets in the group.

The Group assesses whether objective evidence of impairment exists individually for financial assets that are individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.

The recoverable amount of the Group’s loans and receivables carried at amortised cost is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate (i.e. the effective interest rate computed at initial recognition of these financial assets). Receivables with a short duration are not discounted. The amount of any loss is included in the income statement.

An impairment loss in respect of a receivable carried at amortised cost is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised.

Financial assets at fair value

The Group assesses at each balance sheet date whether there is objective evidence that an available-for-sale financial asset is impaired, including in the case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and current fair value, less any impairment loss on the financial asset previously recognised in profit or loss – is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not subsequently reversed. The impairment loss is reversed through the income statement, if in a subsequent period the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss.

Non-financial assets

The recoverable amount of other assets is the greater of their net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. The reversal is recognised in profit or loss.

An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

1.10

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.

1.11

Financial liabilities

The amount due to cell shareholders represents the cell shareholders’ funds in respect of the insurance business conducted in the cell structures. The fair value of amounts due to cell shareholders is the consideration received for the “A” ordinary shares plus the accumulated funds in respect of business conducted in the cells.

1.12

Investment properties

Investment properties are properties which are held either to earn rental income or for capital appreciation, or for both and which are not occupied by companies in the Group. Investment properties are measured initially at fair value, including transaction fair value. After initial recognition investment properties are measured at fair value. An external, independent valuer, having an appropriate recognised professional qualification and recent experience in the location and category of property being valued, values the properties annually. The fair values are based on market values, being the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.

Any gain or loss arising from a change in fair value is recognised in the income statement.

If an investment property becomes owner occupied it is reclassified as property and equipment and its fair value at that date becomes its cost for subsequent accounting measurement.

1.13

Cash and cash equivalents

Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less.

1.14

Share capital

Shares are classified as equity when there is no obligation to transfer cash or other assets. Incremental costs directly attributable to the issue of equity instruments are shown in equity as a deduction to the proceeds, net of tax. Incremental costs directly attributable to the issue of equity instruments as consideration for the acquisition of a business are included in the cost of acquisition.

Where any Group company purchases the Company’s equity share capital (treasury shares) the consideration paid including any directly attributable incremental costs (net of tax) is deducted from equity attributable to the shareholders of the Company. Where such shares are subsequently sold, reissued or otherwise disposed any consideration received is included in equity attributable to the Company’s shareholders net of any directly attributable incremental transaction costs and the related income tax effects.

1.15

Statutory contingency reserve

The annual adjustment to the statutory contingency reserve stems from premium increases or decreases during the year and is reflected as an appropriation to or from retained earnings. The statutory contingency reserve is calculated as 10% on net written premium in terms of the Short-Term Insurance Act.

1.16

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 recognised in the income statement on a straight-line basis over the term of the lease.

1.17

Revenue

The accounting policy in relation to revenue from insurance contracts is disclosed in note 1.5.

Interest and dividends

Interest on interest bearing financial instruments not at fair value through income is accounted for using the effective interest method. Dividends on available-for-sale financial instruments are recognised at the last day for registration in respect of quoted shares and when declared in respect of unquoted shares and are recognised in the income statement.

Rental income

Rental income from investment properties is recognised in the income statement on a straight-line basis over the term of each lease.

Fee income

Revenue arising from management and other related services offered by the Group for cell captive business and primary risk policies is recognised in the period in which the service is rendered.

Reinsurance commission revenue

Reinsurance commission on reinsurance contracts placed is recognised in the income statement on a straight-line basis over the term of the contract.

1.18

Taxation

Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case the related income tax is also recognised in equity.

Current tax

Current tax is the expected tax payable on the taxable profit for the year, using tax rates enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred tax

Deferred tax is provided in full, using the liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes, and the amounts used for taxation purposes. However if the deferred income tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction effects neither accounting nor tax profit or loss, it is not accounted for. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date.

In respect of temporary differences arising on fair value adjustments on investment properties, deferred taxation is provided at the use rate if the property is considered to be a long-term strategic investment or at the capital gains tax effective rate if recovery is anticipated to be through disposal.

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

Secondary Tax on Companies

Secondary Tax on Companies that arises from the distribution of dividends is recognised at the same time as the liability to pay the related dividend. Where there is an unutilised secondary tax credit these are carried forward and applied to the secondary tax liability when this arises.

1.19

Employee benefits

Group companies operate various pension schemes and has both defined benefit and defined contribution plans. A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity. The Group has no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to service in the current and prior periods.

Defined benefit plans

The Group’s net obligation in respect of defined benefit pension plans is the present value of the defined benefit obligation less the fair value of any plan assets, together with adjustments for unrecognised actuarial gains or losses and past service cost. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows of the benefits that will be paid to employees and using interest rates of government bonds that have terms to maturity approximating the terms of the related pension obligations. The calculation is performed annually by a qualified actuary using the projected unit credit method.

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

Past-service costs are recognised immediately in income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period), in which case the past-service costs are amortised on a straight-line basis over the vesting period.

Defined contribution plans

Contributions to defined contribution pension plans are recognised as an employee benefit expense in the income statement as they become due. The Group has no further obligation for benefits once the payment has been made.

Long-term service benefits

The Group provides post-retirement healthcare benefits to current and future pensioners, except in the case of employees who joined the Group after 30 September 2002 from which date these employees are no longer entitled to this benefit. The entitlement to the post-retirement healthcare benefits is conditional on the employee remaining in service up to retirement age. The expected costs of these benefits are accrued over the period of employment using the projected unit credit method. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to income over the expected average remaining working lives of the related employees. Independent qualified actuaries value these obligations annually.

Long Term Performance Share Plan

Where key business performance targets are met, certain Directors and Senior Executives of the Group receive Zurich Financial Services shares. Based on a three-year plan cycle, performance is measured against agreed criteria. The cost of the shares is charged to the Group by Zurich Financial Services and expensed as paid.

Profit sharing, bonus plans and leave pay

The Group recognises a liability, under other payables, and an expense for profit shares, bonus plans and leave pay based on the applicable bases. The Group recognises the liability where contractually obliged or where through past practice a constructive liability has been created.

1.20

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.

1.21

Dividend distribution

Dividend distribution to the Company’s shareholders is recognised as a liability in the financial statements in the period in which the dividend is approved by the shareholders.

1.22

Offsetting financial offsetting

Financial assets and liabilities are offset and the net amount reported in the balance sheet only when there is a legally enforceable right to offset the amounts and there is an intension to settle on a net basis or to realise the asset and settle the liability simultaneously.

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