Zurich Insurance Company
South Africa Annual Report 2010


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» Notes to the annual financial statements
     for the year ended 31 December 2010
   
1.
General information
Zurich Insurance Company South Africa Limited (“the Company”) and its subsidiaries and associates (together forming “the Group”) underwrite all classes of short-term insurance business and offer premium collection services. The Group operates in the Republic of South Africa and Botswana.
 
The Company is incorporated and domiciled in the Republic of South Africa and is listed on the JSE Limited in South Africa. The address of its registered office is: 15 Marshall Street, Ferreirasdorp, Johannesburg, 2001, South Africa.
 
The immediate holding company is SA Fire House Limited incorporated in South Africa. The ultimate parent company is Zurich Financial Services Limited incorporated in Switzerland.
 
The financial statements were authorised for issue on 26 January 2011 by the Board of Directors. The entity’s owners or others do not have the power to amend the financial statements after issue.
 
1.1
Summary of significant accounting policies
The principal accounting policies applied in the preparation of these consolidated and Company annual financial statements are set out below. These policies have been consistently applied to all the years presented and across all subsidiary companies, where applicable, unless otherwise stated.
 
1.2
Basis of presentation
These annual financial statements are prepared in accordance with International Financial Reporting Standards (IFRS). They have been prepared under the historical cost convention except where otherwise stated in the accounting policies below.
 
All amounts are shown in rand thousands, rounded to the nearest thousand rand, unless otherwise stated, with the consequence that the rounded amounts may not add to the rounded total in all cases.
 
The preparation of financial statements, in conformity with IFRS, requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the annual financial statements are disclosed in note 1.24.
 
1.3
New standards and amendments
New and amended standards adopted by the Group
The following new standard and amendment to standards are mandatory for the first time for the financial year beginning January 2010:
 
IFRS 3 (revised), Business combinations and consequential amendments to IAS 27, Consolidated and separate financial statements, IAS 28, Investments in associates are effective prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009. IAS 27 (revised), requires the effect of all transactions with non-controlling interests to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses.
 
The following new standards and amendments to standards are mandatory for the first time for the financial year beginning January 2010 but are not currently relevant to the Group:
 
IFRIC 17, Distribution of non-cash assets to owners. This interpretation provides guidance on accounting for arrangements whereby an entity distributes non-cash assets to shareholders as a distribution of reserves or as dividend.
 
IFRIC 18, Transfers of assets from customers.
 
IFRIC 9, Reassessment of embedded derivatives and IAS 39, Financial instruments: recognition and measurement. This requires an entity to assess whether an embedded derivative should be separated from a host contract when the entity reclassifies a hybrid financial asset out of the fair value through profit or loss category.
 
IFRIC 16, Hedges of a net investment in a foreign operation. This amendment states that a qualifying hedge instrument may be held by any entity within the Group.
 
IAS 1 (amendment), Presentation of financial statements. The amendment clarifies that the potential settlement of a liability by the issue of equity is not relevant to its classification as current or non-current.
 
IAS 36 (amendment), Impairment of assets. The amendment clarifies that the largest cash-generating unit which goodwill should be allocated for the purposes of impairment is an operating segment.
 
IFRS 2 (amendment), Group cash-settled share-based payment transactions. This amendment expands on the guidance in IFRIC 11 on the classification of group arrangements.
 
IFRS 5 (amendment), Non-current assets held for sale and discontinued operations. This amendment specifies the disclosures required for non-current assets.
 
The following new standards and amendments to standards are issued, but not effective for the financial year beginning January 2010 and not early adopted:
 
IFRS 9, Financial instruments. This is the first step in the replacement of IAS 39. IFRS 9 introduces new requirements for classifying and measuring financial assets. There will no longer be the fair value and available-for-sale classifications; all unrealised gains will be recorded through the statement of financial performance giving less volatility in shareholders equity but more in the profit and loss. Loans and receivables will be recorded at amortised cost accounting for expected future credit losses. This standard is not applicable until January 2013 but is available for early adoption, which the Group has not done.
 
IAS 24 (revised), Related party disclosures. This standard supersedes IAS 24. It clarifies and simplifies the definition of a related party. The Group will apply this standard from 1 January 2011. When this standard is applied, the Group and parent will need to disclose any transactions between its subsidiaries and its associates. The Group is currently putting systems in place to capture the necessary information.
 
Classification of rights issues, (amendment to IAS 32). The amendment applies to annual periods beginning on or after February 2010. This amendment addresses the accounting of a rights issue that is denominated in a currency other than the functional currency of the issuer. Provided certain conditions are met, such rights issues are classified as equity, regardless of the currency in which the exercise price is denominated. This standard is not expected to have any impact on the Company and Group’s financial statements.
 
IFRIC 19, Extinguishing financial liabilities with equity instruments. This clarifies the accounting when the terms of a financial liability are renegotiated and they result in the entity issuing equity instruments to a creditor to extinguish all or part of the financial liability (debt for equity swap). It is not expected to have any impact on the Company and Group’s financial statements.
 
Prepayments of a minimum funding requirement (amendment to IFRIC 14). Without this amendment, entities are not permitted to recognise as an asset some voluntary prepayments for minimum funding contributions. This was not intended when IFRIC 14 was issued. It is not expected to have any impact on the Company and Group’s financial statements.
   
1.4
Basis of consolidation
Subsidiaries
The consolidated annual financial statements include the Company and its subsidiaries.
 
Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity.
 
The Group uses the purchase method to account for the acquisition of subsidiaries. The cost of an acquisition is measured at 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 non-controlling 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 statement of financial performance.
 
Subsidiaries are consolidated 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 aremeasured at cost less provision for impairment in the Company’s separate financial statements.
 
Intragroup transactions, balances and unrealised gains on intragroup transactions are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Subsidiaries’ accounting policies have been changed where necessary to ensure consistency with the policies adopted by the Group.
 
Transactions and non-controlling interest
The Group treats transactions with non-controlling interests as transactions with equity owners of the Group. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interest are also recorded in equity.
 
When the Group ceases to have control or significant influence, any retained interest in the entity is remeasured to its fair value, with the change in carrying amount recognised in profit and loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss.
 
If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously recognised in other comprehensive income are reclassified to profit or loss where appropriate.

  Associated companies
Associated companies are those entities over which the Company and Group has significant influence, but not control, over the financial and operating policies. This is generally indicated by a voting right in the entity of between 20% and 50%.

Investments in associates are initially recognised at cost and are subsequently accounted for using the equity method of accounting. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Associates’ accounting policies have been changed where necessary to ensure consistency with the policies adopted by the Group.

The Group’s share of its associates’ post-acquisition profits or losses is recognised in the statement of financial performance, and its share of post-acquisition movements in the statement of comprehensive income of the associate is recognised in the statement of comprehensive income of the Group. 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.

Business combinations
The Group accounts for business combinations using the acquisition method of accounting. The cost of the business combination is measured as the aggregate of the fair values of assets given, liabilities incurred or assumed and equity instruments issued. Costs directly attributable to the business combination are expensed as incurred, except the costs to issue debt which are amortised as part of the effective interest and costs to issue equity which are included in equity.

Contingent consideration is included in the cost of the business combination at fair value as at the date of acquisition. Subsequent changes to the assets, liabilities or equity which arise as a result of the contingent consideration are not affected against goodwill, unless they are valid measurement period adjustments.

The acquiree’s identifiable assets, liabilities and contingent liabilities which meet the recognition conditions of IFRS 3 Business Combinations are recognised at their fair values at acquisition date, except for non-current assets (or disposal group) that are classified as held-for-sale in accordance with IFRS 5 Non-current Assets Held For Sale and Discontinued Operations, which are recognised at fair value less costs to sell.

Contingent liabilities are only included in the identifiable assets and liabilities of the acquiree where there is a present obligation at acquisition date.

On acquisition, the Group assesses the classification of the acquiree’s assets and liabilities and reclassifies them where the classification is inappropriate for Group purposes. This excludes lease agreements and insurance contracts, whose classification remains as per their inception date.

Non-controlling interest arising from a business combination is measured either at their share of the fair value of the assets and liabilities of the acquiree or at fair value. The treatment is not an accounting policy choice but is selected for each individual business combination, and disclosed in the note for business combinations.

In cases where the Group held a non-controlling shareholding in the acquiree prior to obtaining control, that interest is measured to fair value as at acquisition date. The measurement to fair value is included in profit or loss for the year. Where the existing shareholding was classified as an available-for-sale financial asset, the cumulative fair value adjustments recognised previously to other comprehensive income and accumulated in equity are recognised in profit or loss as a reclassification adjustment.
   
Goodwill is determined as the consideration paid, plus the fair value of any shareholding held prior to obtaining control,
plus non-controlling interest and less the fair value of the identifiable assets and liabilities of the acquiree.
   
Goodwill is not amortised but is tested on an annual basis for impairment. If goodwill is assessed to be impaired, that
impairment is not subsequently reversed.
   
1.5
 Foreign currencies
Functional and presentation currency
Items included in the annual 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 annual financial statements are presented in South African Rands, which is the Company’s and Group’s presentation currency.
   
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of financial performance.
 
Foreign exchange gains and losses are presented in administrative and other operating expenses in the statement of financial performance. Translation differences related to changes in amortised cost are recognised in profit and loss, while other changes in carrying amount are recognised in other comprehensive income. Translation differences on non-monetary financial assets and liabilities such as equities held at fair value through profit or loss are recognised in the statement of financial performance. Translation differences on non-monetary financial assets, such as equities classified as available-for-sale, are included in comprehensive income.
   
1.6
 Classification of insurance contracts
The Group issues contracts that assume the transfer of insurance risk. 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. Such contracts may also transfer finance risk.
 
Structured insurance and risk financing solutions
Zurich Risk Financing SA Limited, one of the Group’s entities, offers structured insurance and risk financing solutions on the following basis:
 
Cell captive business
A cell captive is a contractual arrangement entered into between the insurer and the cell shareholder whereby the risks and rewards associated with certain insurance activities accrue to the cell shareholder. Cell captive insurers allow the cell owners to purchase “A” ordinary shares in the registered insurance company which undertakes the professional insurance and financial management of the cell. The terms and conditions of the cell are governed by the shareholders’ agreement.
 
There are two types of cell captive arrangements:
•   First party: risks that are being insured relate to the cell shareholder’s own operations or operations within the cell shareholder’s
    group of companies. Zurich Risk Financing SA Limited does not currently have first party cell captive arrangements.
•  Captive insurers: the cell owner provides the opportunity to its own customer base to buy branded insurance products. The cell is
    the principal to the insurance contract, although the business is underwritten for the benefit of the cell shareholder.
 
Cell captive business is deemed to meet the definition of a special purpose entity due to the cell shareholder’s rights to obtain the majority of the future economic benefits of the cell’s insurance activities. Therefore there is no impact on the Company’s net profit after tax from underwriting and investments results of insurance contracts underwritten in cell arrangements. The cell owner does not compensate the insurer for losses made on insurance business written in the owner’s cell. This is credit risk. The cell shareholder’s agreement meets the definition of a reinsurance contract in terms of IFRS 4. The insurer passes significant insurance risk, in respect of the policies issued to insurers, on to the cell shareholder. The cell shareholder is ultimately responsible for all claims in respect of the policies issued by the insurer. In addition, stand alone structured insurance contracts are written apart from cells. Where risks are not transferred deposit accounting is used to account for these policies.
   
1.7
 Recognition and measurement of insurance contracts
Gross written insurance premium
Insurance premium 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. Revenue from gross written insurance premiums includes adjustments to premiums written in prior accounting periods and is shown before deduction of commission payable, and excludes value added tax.
 
Premiums received under cell captive business are included in gross written insurance premium in the statement of financial performance. These premiums are subsequently ceded or reinsured to insurance cells and are reflected as such in the statement of financial performance.
 
Premiums are earned from the date the risk attaches, over the indemnity period based on the pattern of risks underwritten.
 
Unearned insurance premiums
Unearned premiums, which represent the proportion of premiums written in the current year which relate to risks that have not commenced or expired at the statement of financial position date, are calculated on a basis that best represents the unearned risk profile for the underlying business.
 
Unearned premiums are calculated using the 365th method.
 
Claims
Claims paid during the financial year together with the movement in the provision for outstanding claims are recognised in the statement of financial performance. The provision for outstanding claims comprises the Group’s estimate of the undiscounted ultimate cost of settling all claims incurred but unpaid at the statement of financial position date whether reported or not and related 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 analysis for claims incurred but not reported.
 
Claims paid and the movement in the provision for outstanding claims under cell captive business are provided for as above. These claims are reinsured to insurance cells and are reflected as such in the statement of financial performance.
 
Salvage and subrogation reimbursements
Some insurance contracts permit the Group to sell (usually damaged) property acquired in settling a claim (ie salvage). The Group might also have the right to pursue third parties for the payment of some or all costs (ie subrogation).
   
Estimates of salvage recoveries and subrogation are not included as an allowance in the measurement of the insurance liability for claims. Salvage property and subrogation reimbursements are included in loans and receivables. An impairment test is performed each year-end on these balances.
 
Liability adequacy test
The unexpired risk provision meets the criteria of the liability adequacy test required by IFRS 4 and therefore a detailed liability adequacy test has not been performed. A provision should be made for unexpired risks where the expected value of claims and expenses attributable to the unexpired periods of policies in force at the statement of financial position date exceeds the unearned premiums provision in relation to such policies after the deduction of any deferred acquisition costs. The need for an unexpired risk provision has been considered separately by reference to classes of business that are managed together, after taking into account the relevant investment returns.
 
Reinsurance
Contracts entered into by the Group with reinsurers under which the Group is compensated for losses on one or more contracts and that meet the classification requirements for insurance contracts, are classified as reinsurance contracts held. Insurance contracts entered into by the Group under which the contract holder is another insurer (inwards reinsurance) are included with insurance contracts.
 
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 (ie financial reinsurance) are accounted for as financial assets.
 
The benefits to which the Group is entitled under its reinsurance contracts held are recognised as assets. These assets comprise commissions due from and claims recoverable from reinsurers and the expected recoverable claims and benefits arising in consequence of expected gross claims payable and IBNR. Amounts recoverable from and due to reinsurers are measured in accordance with the terms of each reinsurance contract. Premiums payable to reinsurers for reinsurance contracts are recognised as a liability when due. The respective net amounts due to/from reinsurers are treated either as loans and receivables or as accounts payable. The reinsurer’s share of expected claims and IBNR are treated as an insurance asset.
 
Outward reinsurance premiums are recognised as an expense in the period to which they relate. The reinsurer’s share of unearned premium is calculated using the 365th method.
 
Amounts recoverable under reinsurance contracts are assessed for impairment at each statement of financial position 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 statement of financial performance. The Group gathers the objective evidence that a reinsurance receivable is impaired using the same process adopted for financial assets at amortised cost. The impairment loss is also calculated using the same method used for these financial assets.
 
Insurance receivables and payables
Receivables and payables are recognised when due. These include amounts due to and from agents, brokers and insurance contract holders. These are recorded initially at fair value and are subsequently measured at amortised cost.
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 statement of financial performance. 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 using the same method used for financial assets at amortised cost.
 
Reinsurance commission revenue
Reinsurance commission received on new or renewal contracts is deferred and recognised in the statement of financial performance over the period of the related direct insurance or reinsurance business assumed.
 
Deferred acquisition costs (DAC)
Direct incremental costs of acquiring new contracts and renewing existing contracts are capitalised. Deferred acquisition costs are amortised on a pro rata basis over the contract term as premium is earned. All other costs are recognised as expenses when incurred.
   
1.8
 Land, buildings and equipment
Land and buildings
Land and buildings are shown at fair value, based on a valuation performed by an external independent appraiser every five years, less subsequent depreciation for buildings. Any accumulated depreciation at the date of revaluation is eliminated against gross carrying amount of the asset, and the net amount is restated to the revalued amount of the asset.
 
Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the statement of financial performance during the financial period in which they are incurred.
 
Increases in the carrying amount arising on revaluation of land and buildings are credited to the revaluation reserve. Decreases that offset previous increases of the same asset are charged against reserves through other comprehensive income. All of these items are taken to equity through the statement of comprehensive income; all other decreases are charged to the statement of financial performance. At each revaluation date, the difference between depreciation based on the revalued carrying amount of the asset charged to the statement of comprehensive income and depreciation based on the asset’s original cost, net of any related deferred income tax, is transferred from the revaluation surplus to retained earnings.
 
Land is not depreciated.
 
Equipment
Motor vehicles, furniture, office equipment, computer equipment and leasehold improvements are stated at historical cost less accumulated depreciation and impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items.
 
Repairs and maintenance are charged to the statement of financial performance during the financial period in which they are incurred. The cost of major renovation is included in the carrying amount of the asset when it is probable that future economic benefits in excess of the originally assessed standard of performance of the existing asset will flow to the Group. Major renovations are depreciated over the remaining useful life of the related asset.
   
Depreciation is provided on a straight-line basis:
Item Average useful life
Buildings 40 years
Furniture and fixtures 5 - 10 years
Motor vehicles 3 - 5 years
Office equipment 3 - 5 years
Computer equipment 3 - 5 years
Leasehold improvements 5 - 10 years
 
The residual values and useful lives of equipment are reviewed at each statement of financial position date and adjusted accordingly. The accounting policy in regard to the impairment is described in note 1.11. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.
 
Disposals
Gains and losses on disposals, which are included in operating profit, are determined by comparing the proceeds with the carrying amounts. When revalued assets are sold, the amounts included in the revaluation surplus are transferred to retained earnings in the statement of comprehensive income.
 
1.9
 Financial instruments
The Group’s financial assets are classified into three categories, depending on the purpose for which the assets have been acquired. The categories are: financial assets at fair value through income, available-for-sale financial assets and loans and receivables.
 
Management determines the classification of its investments at initial recognition depending on the purpose for which the investments were acquired and re-evaluates this at every reporting date, except for those designated at fair value through income.
 
Classification
Financial assets at fair value through income
Financial assets at fair value through income are split into financial assets held for trading and those designated at fair value through income at inception by the Group. Financial assets are designated as fair value through income at inception if they are held to match insurance liabilities held at fair value through income, or if they are managed and their performance is evaluated on a fair value basis.
 
Available-for-sale financial assets
Available-for-sale financial assets are non-derivative financial assets that are designated in this category or not classified into any other category. They are intended to be held for an indefinite period of time and that 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 the Group 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 and are reviewed for impairment as part of the impairment review of loans and receivables.
 
Recognition and measurement
Purchases and sales of financial assets are recognised on the trade date, which is the date of commitment to purchase or sell the asset.
 
Financial assets are derecognised when the rights to receive cash flows from them have expired or where they have been transferred and the Group has also transferred substantially all risks and rewards of ownership.
 
Financial assets are initially measured at fair value 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 at fair value through income, transaction costs are expensed in the statement of financial performance.
 
After initial recognition, the Group subsequently measures financial assets 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 quoted investments is their quoted bid prices at the statement of financial position 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.
 
Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Realised and unrealised gains and losses arising from changes in the fair value of the financial assets at fair value through income category are included in the statement of financial performance in the period in which they arise. Unrealised gains and losses arising from changes in the fair value of available-for-sale are recognised in other comprehensive income. When available-for-sale securities are sold or impaired, the accumulated fair value adjustments are included in the statement of financial performance as net realised gains/losses in financial assets.
 
The fair value of quoted investments are based on current bid prices. If the market for the financial asset is not active, the Group establishes fair value by using valuation techniques. These include recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis and option-pricing models making maximum use of market inputs and relying as little as possible on entity specific inputs.
 
The fair value of unit trusts is measured at their repurchase price.
 
Loans and receivables are initially measured at fair value and subsequently measured at amortised cost using the effective interest rate method, less provision for impairment.
 
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 statement of financial performance 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 in the statement of comprehensive income. When available-for-sale financial assets are sold or impaired, the cumulative gains or losses previously recognised in other comprehensive income are recognised in the statement of financial performance. Unrealised gains and losses exclude interest or dividend income.
 
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 the amortised cost of monetary securities are recognised in income. Translation differences on non-monetary securities are recognised in the statement of comprehensive income. Unrealised gains or losses on monetary and non-monetary securities classified as available-for-sale are recognised in the statement of comprehensive income.
 
Interest on available-for-sale financial assets calculated using the effective interest method is recognised in the statement of financial performance. Dividends on available-for-sale equity instruments are recognised in the statement of comprehensive income when the Group’s right to receive payment is established.
 
Trade and other receivables
Trade receivables are measured at initial recognition at fair value, and are subsequently measured at amortised cost using the effective interest rate method. Appropriate allowances for estimated irrecoverable amounts are recognised in profit or loss when there is objective evidence that the asset is impaired. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 45 days overdue) are considered indicators that the trade receivable is impaired. The allowance recognised is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition.
 
The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in profit or loss within operating expenses. When a trade receivable is uncollectable, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against operating expenses in profit or loss.
 
Trade and other receivables are classified as loans and receivables.
 
Trade and other payables
Trade payables are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest rate method.
 
Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and demand deposits and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. These are initially and subsequently recorded at amortised cost.
 
Derecognition of financial instruments
Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership.
   
1.10
 Intangible assets
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary or associate at the acquisition date. Goodwill on acquisition of subsidiaries is included in intangible assets. Goodwill on acquisition of associates is included in the carrying amount of investments in associates. Goodwill is not amortised but is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment charge recognised on goodwill is not reversible. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.
 
Goodwill is allocated to the cash generating business unit it relates to for the purposes of impairment testing.
 
Computer software
Costs associated with maintaining computer software programs are recognised as an expense as incurred. Costs that are directly associated with the development of identifiable and unique software products controlled by the Group are recognised as intangible assets when the following criteria are met:
•   It is technically feasible to complete the software product so that it will be available for use;
•   Management intends to complete the software product and use or sell it;
•   There is an ability to use or sell the software product;
•   It can be demonstrated how the software product will generate probable future economic benefits;
•   Adequate technical, financial and other resources to complete the development and to use or sell the software product are
     available; and
•   The expenditure attributable to the software product during its development can be reliably measured.
 
Directly attributable costs that are capitalised as part of the software product include the software development employee costs and an appropriate portion of relevant overheads. Other development expenditures that do not meet these criteria are recognised as expenses as incurred. Development costs previously recognised as expenses are not recognised as assets in a subsequent period.
 
Computer software recognised as assets are amortised over their estimated useful lives, which does not exceed five years.
   
1.11
 Impairment
Financial assets at amortised cost
The carrying amounts of the Group’s assets are reviewed at each reporting date to determine whether there is objective evidence of impairment. If any such evidence exists, the carrying value is reduced to the estimated recoverable amount by means of a charge to the statement of financial performance.
 
A financial asset or group of financial assets is impaired only if there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset, where that loss event has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.
 
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 becomes 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;
•   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.
If there is objective evidence that an impairment loss has been incurred on loans and receivables, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows.
 
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 (ie 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 statement of financial performance.
 
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 available-for-sale
The Group evaluates available-for-sale financial assets for impairment when there has been a significant or prolonged decline in the fair value below its cost. Available-for-sale assets are impaired when the evidence indicates that the decline is permanent in nature.
 
A 50% decline in fair value since acquisition, or a 20% decline in the prior 12 months is deemed significant. Further evidence used to determine if the decline is permanent includes market capitalisation, net asset value and market analyst predictions.
 
If an available-for-sale investment is impaired, an amount comprising the difference between its cost (net of any principal payment and amortisation) and its current value, less any impairment loss previously recognised in profit and loss, is transferred from equity to profit and loss. Reversals in respect of equities classified as available-for-sale are not recognised through the statement of financial performance.
 
Non-financial assets
Assets that have an indefinite useful life are tested annually for impairment. Other non-financial assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount.
 
The recoverable amount is the greater of an asset’s 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 pretax 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.
   
1.12
 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. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pretax rate that reflects current market assessments of the time value of money and the risks specific to the obligation.
   
1.13
 Financial liabilities
Trade payables are recognised initially at fair value and subsequently at amortised cost using the effective interest method.
 
Financial liabilities held at amortised cost
Financial liabilities are initially recognised at the fair value plus any transaction costs and are subsequently remeasured at amortised cost.
 
The financial liability due to cell shareholders represents cells’ funds in respect of the insurance business conducted in the cell structure. The premiums and claims relating to primary cells where no risk is transferred are excluded from the statement of financial performance and accounted for directly as part of the liability. The premiums and claims payments relating to contracts in third party cells are included in the statement of financial performance but as the third party cell is the reinsurer, the net result is accounted for as part of the financial liability.
 
The value of the amount due to cells is the consideration received for ‘A’ class ordinary shares plus the accumulated funds in respect of business conducted in the cells plus the investment return allocated to the surplus funds in the cells, which is determined in accordance with the investment mandate with the cell.
 
Other income is disclosed separately.
 
Financial liabilities are derecognised when they are legally extinguished.
   
1.14
 Cash and cash equivalents
Cash and cash equivalents includes cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less.
   
1.15
 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.
   
1.16
 Statutory contingency reserve
Transfers to and from the reserve are taken directly to and from distributable reserves.
 
South African Group companies
The statutory contingency reserve balance is calculated as 10% of net written premium in terms of the South African Short-term Insurance Act, 1998.
 
Botswana
The movement in the statutory contingency reserve is calculated at 10% of profit before tax in accordance with section 11 of the Botswana Insurance Industry Act.
   
1.17
 Leases
Leases of assets under which the leaser effectively retains all the risks and benefits of ownership are classified as operating leases. Payments made under operating leases are recognised in the statement of financial performance on a straight-line basis over the term of the lease.
   
1.18
 Revenue
The accounting policy in relation to revenue from insurance contracts is disclosed in note 1.7.
 
Revenue comprises the fair value for services, net of value added tax, after eliminating revenue within the Group. Revenue is recognised as follows:
 
Interest income and expenses
Interest income and expenses for all interest-bearing financial instruments, including financial instruments measured at fair value through profit and loss, are included within investment income and finance charges in the statement of financial performance using the effective interest rate method.
 
Dividends
Dividends on available-for-sale financial instruments are recognised in the statement of financial performance at the last day for registration in respect of quoted shares and when declared in respect of unquoted shares.
 
Fee income
Revenue arising from management and other related services offered by the Group for cell captive business, and sale of other services is recognised in the period in which the service is rendered.
 
Rendering of services
Revenue arising from asset management and other related services offered by the Group is recognised over the period in which the services are rendered. Fees consist primarily of investment management fees arising from services rendered in conjunction with the issue and management of contracts.
   
1.19
 Taxation
The tax expense comprises current and deferred tax, and Secondary Tax on Companies. Income tax is recognised in the statement of financial performance except to the extent that it relates to items recognised in the statement of comprehensive income, in which case the related income tax is also recognised in the statement of comprehensive income.
   
Current tax
The current income tax charge is calculated on the basis of the tax laws enacted at the statement of financial position date in the countries where the Company, and its subsidiaries and associates operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions, where appropriate, on the basis of amounts expected to be paid to the tax authorities.
   
Deferred tax
Deferred tax is provided in full on 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 affects 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 statement of financial position date.
   
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, it is carried forward and applied to the secondary tax liability when this arises.
   
1.20
 Employee benefits
The Group operates both defined-benefit and defined-contribution pension schemes. A defined-benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. 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 on a defined-contribution fund if the fund does not hold sufficient assets to pay all employees the benefits relating to service in the current and prior periods.
   
The asset recognised in the consolidated statement of financial position in respect of the defined-benefit pension plan is the value of the fund which was outsourced to Metropolitan Life with effect from December 2010. Plan assets exclude any insurance contracts issued by the Group. The defined-benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined-benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity that approximate the terms of the related pension liability.
   
Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognised immediately in income.
   
Defined-contribution pension plan
Contributions to defined-contribution pension plans are recognised as an employee benefit expense in the statement of financial performance as they become due. The contributions are recognised as employee benefit expenses when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available. The Group has no further obligation for benefits once the payment has been made. All employees in service are members of the defined-contribution plan.
 
Defined-benefit pension plan
None of the employees in service are members of the defined-benefit pension plan. All members of this plan are pensioners and therefore in run-off. As of December 2010 the fund was outsourced to Metropolitan Life.
 
Post-retirement medical aid benefits
The Group provides post-retirement healthcare benefits to their pensioners. 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, similar to the defined-benefit pension plan. A total of 12 (2009: 23) employees in service are members of this plan which is in run-off.
 
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.
 
Short-term employee benefits
Short-term employee benefits are employee benefits (other than termination benefits) that are due to be settled within 12 months after the end of the period in which the employees render the related services. This consists of leave pay. The Company’s liability for employees’ accrued annual leave entitlement at the statement of financial position date is recognised as an expense accrual.
 
Share-based compensation
The Group operates an equity-settled, share-based compensation plan, under which the entity receives services from employees as consideration for equity instruments (options) of the Group. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed is determined by reference to the fair value of the options granted, excluding the impact of any non-market service and performance vesting conditions.
 
Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. The total amount expensed is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At each statement of financial position date the Group revises its estimates of the number of options that are expected to vest, based on the non-marketing vesting conditions. It recognises the impact of the revision of original estimates, if any, in the statement of comprehensive income, with a corresponding adjustment to equity.
 
Profitsharing and bonus plans
The Group recognises a liability and an expense for profitsharing and bonuses, based on a formula that takes into consideration the profit attributable to the Company’s shareholders after certain adjustments. The Group recognises a liability where contractually obliged or where there is a past practice that has created a constructive obligation.
   
1.21
 Segmental reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board of Directors that makes strategic decisions.
   
1.22
 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.
   
1.23
 Offsetting of financial instruments
Financial assets and liabilities are offset and the net amount reported in the statement of financial position only when there is a current legally enforceable right to offset the amounts and there is an intention to settle on a net basis or to realise the asset and settle the liability simultaneously.
   
1.24
 Critical accounting estimates and judgements
Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
 
The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts to the assets and liabilities with the next financial year are addressed below:
 
Insurance liabilities
The Group is required to establish provisions for payment of losses and loss adjustment expenses that arise from the Group’s general insurance products. These provisions represent the expected ultimate cost to settle claims occurring prior to, but still outstanding as of, the statement of financial position date. The Group establishes its provisions by product line, type and extent of coverage and year of occurrence. Loss provisions fall into two categories: provisions for reported losses and provisions for losses incurred but not reported (IBNR). Additionally, provisions are held for loss adjustment expenses, which contain the estimated legal and other expenses expected to be incurred to finalise the settlement of the losses.
   
The Group’s provisions for reported losses and loss adjustment expenses are based on estimates of future payments to settle reported general insurance claims. The Group bases such estimates on the facts available at the time the provisions are established. The Group generally establishes these provisions on an undiscounted basis to recognise the estimated costs of bringing pending claims to final settlement, taking into account inflation, as well as other factors that can influence the amount of provisions required, some of which are subjective and some of which are dependent on future events. In determining the level of provisions, the Group considers historical trends and patterns of loss payments, pending levels of unpaid claims and types of coverage. In addition, court decisions, economic conditions and public attitudes may affect the ultimate cost of settlement and, as a result, the Group’s estimation of provisions, between the reporting and final settlement of a claim, circumstances may change, which would result in changes to established provisions. Items such as changes in law and interpretations of relevant case law, results of litigation, changes in medical costs, as well as costs of vehicle and home repair materials and labour rates can substantially impact ultimate settlement costs. Accordingly, the Group reviews and re-evaluates claims and provisions on a regular basis. Amounts ultimately paid for losses and loss adjustment expenses can vary significantly from the level of provisions originally set.
 
The Group establishes IBNR provisions, on an undiscounted basis, to recognise the estimated cost of losses for events which have already occurred but which have not yet been notified. These provisions are established to recognise the estimated costs required to bring claims for these not yet reported losses to final settlement. As these losses have not yet been reported, the Group relies upon historical information and statistical models, based on product line, type and extent of coverage, to estimate its IBNR liability. The Group also uses reported claim trends, claim severities, exposure growth, and other factors in estimating its IBNR provisions. The Group revises these provisions as additional information becomes available and as claims are actually reported.
 
The Group uses a number of accepted actuarial methods to estimate and evaluate the amount of provisions recorded. The nature of the claim being provisioned for and the geographic location of the claim influence the techniques used by the Group’s actuaries.
 
The key assumptions for each class of business are:
 
Provision range
The Mack (Bootstrap) method was used to derive a full predictive distribution for IBNR claims, to gain a better understanding of the variability of the net IBNR provision.
 
Assumption changes
The methods used for the projection of the estimated ultimate claims are based on analysing trends in the progression of paid and incurred claims (defined to be the sum of paid claims and notified outstanding claims) from past data and projecting this development pattern into the future. There has been no change in the methods used. This process implicitly assumes that the development pattern is stable over time. It also assumes that past patterns of inflation will be repeated in future. There is thus no explicit assumption for inflation. There are no explicit assumptions for catastrophes, with trends in the development of past catastrophes being projected into the future.

  Sensitivity analysis
If the provisions for incurred claims change by 10%, the impact on net income after tax is as follows:
         
 
2010
2009
 
Increase 10%  
Decrease 10%  
Increase 10%  
Decrease 10%  
 
R’000  
R’000  
R’000  
R’000  
Group
  
  
  
  
Outstanding claims
  
  
  
  
- Net income after taxation
(62,917) 
62,917  
(67,743) 
67,743  
IBNR
  
  
  
  
- Net income after taxation
(30,364) 
30,364  
(29,408) 
29,408  
Company
  
  
  
  
Outstanding claims
  
  
  
  
- Net income after taxation
(62,041) 
62,041  
(69,991) 
69,991  
IBNR
  
  
  
  
- Net income after taxation
(28,389) 
28,389  
(26,905) 
26,905  
 
Employee obligation
The Group operates a post-employment medical plan. In assessing the liability for this plan, critical judgements include estimates of mortality rates, disability, early retirement, discount rates, expected long-term rates of return on plan assets, future salary increases and future pension increases/decreases in long-term healthcare costs. The assumptions could differ from actual results due to changing economic conditions, higher or lower withdrawal rates or changes in the life spans of the participants. These differences may result in variability of pension income or expenses recorded in future years. Refer to note 11 for further information on employee benefits.
 
Critical judgements in applying the entity’s accounting policies
Fair value of financial assets
Certain of the Group’s assets are recorded at fair value on the statement of financial position. Fair value determinations for financial assets and liabilities are based generally on listed market prices or broker or dealer price quotations. If prices are not readily determinable, fair value is based on either internal valuation models or management estimates of amounts that could be realised under current market conditions. Fair values of certain financial instruments are determined using pricing models that consider, among other factors, contractual and market prices; correlations; yield curves; credit spreads; volatility factors and prepayment rates of the underlying positions. The use of different pricing models and assumptions could lead to different estimates of fair value. Refer to note 3.
 
Allowance for impairment on receivables
At each statement of financial position date management considers each debtor to determine if it is recoverable, or whether its recovery is doubtful. Each debtor is assessed individually and a provision is made for those where indications exist that recovery is uncertain or where clear evidence exists that the outstanding amount will not be recovered. Refer to note 9.