16th Mar 2007 07:02
Novae Group PLC16 March 2007 NEWS RELEASE 16 March 2007 For immediate release Novae Group plc Preliminary results for the year ended 31 December 2006 Highlights Novae Group plc ("Novae"), the specialist insurance group, today announces its2006 preliminary results. Highlights: - Profit before tax and exceptional items £32.8 million (2005: £17.9 millionloss) - Operating profit before foreign exchange movements and finance costs £53.3million (2005: £0.1 million loss) - Headline return on equity 18.0% (2005: loss). Underlying return on equity28.1% - Earnings per share 3.8p (2005: 4.8p loss) - Combined ratio: 81.4% (2005: 104.6%) - Net assets per share: 33.0p (2005: 31.2p) - Net tangible assets per share: 32.0p (2005: 28.9p) - Exceptional provision usage £14.3 million (2005: £40.0 million), with £12.8million available to carry forward. Commenting on the results, Matthew Fosh, Group Chief Executive, said: "2006 was a defining year for Novae. The formation of our FSA insurance companyand the associated rights issue were major steps forward for the Group. We havereported operating profits of over £50 million and the legacy effects continueto ebb. Although evidence of a steadily softening underwriting cycle continues,high quality underwriting teams are keen to join us, and morale over continuedprospects for growth and profitability in 2007 remains high" - ENDS - There will be a presentation to analysts at 10.00 a.m. today at M:Communications, CityPoint, 1 Ropemaker Street, EC2Y 9HT in the Madrid Room, 9thFloor. For further information: Matthew Fosh - Novae Group plc 020 7903 7300 Nick Miles - M:Communications 020 7153 1521 Novae Group plc Preliminary results for the year ended 31 December 2006 Chairman's statement 2006 has been a defining 12 months for Novae after four years of recovery andrehabilitation. The Group has reported its highest ever level of profitability;it achieved its strategic aim of setting up a second platform to write inparallel with the Group's traditional Lloyd's business; and the damaging effectsof the Group's legacy underwriting from 1997 - 2000 have continued to fade. Novae reported pre tax profits of £31.3 million in 2006. At a time when costsfrom the past were still being absorbed this was an excellent performance,albeit assisted by the industry's largely favourable rating environment andbenign claims experience. During 2006 the rating environment has clearlysoftened in a number of classes, particularly in UK commercial and liabilitylines, but this is from very high levels, so the immediate outlook remainsencouraging. Nevertheless vigilance will be required over the medium term, andwe will reduce our risk exposure as the cycle softens. We have no difficulty inwriting less than we predict if the result is that we protect our shareholders'capital. Measured growth and diversification remain the order of the day; in ourjudgement rapid growth and a land grab strategy are unlikely to be inshareholders' best interests. The formation of Novae Insurance Company last July and the associated capitalraising achieved the Group's long held aim of platform diversification. Theyalso had other major benefits. Novae is significantly less highly geared, andthe quality of earnings is much improved. The Group returned to the bankingmarket on normal commercial terms as confidence in our rehabilitation grew. There-branding and internal reorganisation that accompanied the "one business, twoplatforms" philosophy were further steps towards stabilising and normalising thebusiness. Novae's legacy underwriting from the late 1990's has cost shareholders over £250million. By 2004, when the new management team established the £103.6 millionexceptional loss provision, considerable uncertainty remained about the eventualoutcome. Now, although the legacy still has the potential to cause surprises,its volatility is ebbing markedly quarter on quarter. Our proposition that thegross incurred position stabilises by the sixth year after inception has thusfar been borne out by events. We continue to examine transactional solutions todecouple the assets and liabilities making up the legacy, but will only do sofrom a position of negotiating strength. Looking to the future, the flexibility afforded by our newly formed insurancecompany gives us scope to alter underwriting capacity as the rating environmentchanges. We remain committed to writing large premium, international business inthe Lloyd's subscription market. This can be very profitable, and we can onlyaccess this business from within the Lloyd's franchise. However, in isolationthe profitability of such business is volatile, and makes for a difficultinvestment proposition in the public markets. Small and mid-sized, UK regionalbusiness is an important counter-weight to our Lloyd's operation. This strategyof diversification reduces overall volatility and renders the business lessexposed to the extremes of the underwriting cycle. Progress made in 2006 means that we intend to return to the dividend list in thenext twelve months. This achievement reflects the commitment, resilience andpatience of Novae's employees, business partners and capital providers. All havekept faith during the past four years as Novae has worked hard to free itself ofits past and to demonstrate, beyond doubt, that its core franchise is healthyand highly profitable. We owe a particular debt to our employees who, whilstworking at a significant financial and reputational disadvantage, have delivereda market-beating performance in each of the past four years. There have been some important changes to the Board in the last year. InSeptember we welcomed David Henderson as a non-executive director. David, who iscurrently Chairman of Kleinwort Benson Private Bank, has had a long anddistinguished career in financial services and we have already benefited fromhis views and advice. In December, Luigi Santambrogio stood down from the Boardupon his appointment as Chief Executive of Brederode SA. Luigi has been anon-executive director or alternate for another Brederode representative since1998 and we thank him and his colleagues for their advice and support over manyyears. Clive Chaplin has indicated that he will not be seeking re-election atthis year's Annual General Meeting, having been on the Board of Novae and itspredecessor companies since 1993. On behalf of both the Board and the Group as awhole we wish Clive well for the future, and it is with sadness that we see himdepart. We have begun the search for a new independent non-executive director toreplace Clive. Finally, having joined the Board as Chairman in 1998, I will have served fornine years this autumn. Consequently the Board will be instigating the searchfor my successor following our AGM in May this year. Despite the difficultchallenges we have faced since 2000, the business is now demonstrably restoredto health and this is a logical time for me to stand down. Paul Selway-Swift Chairman 16 March 2007 Operating and financial review Our business Novae is a UK domiciled, risk-taking insurance business. It deploys capital toassume underwriting risk in its two operating platforms: Lloyd's and NovaeInsurance Company Limited ("NICL"), its FSA-authorised insurance company. Itspecialises in providing insurance cover to commercial enterprises. Reinsuranceprotection is also provided to other insurance companies around the world. Novae has a diversified mix of business with underwriters operating across 17specialist classes of business. These are organised into four reportingsegments: • Specialty • Property • Liability • Aviation & Marine Novae's managing agency subsidiary was formed in 1986. In 1998 SVB (as thebusiness was then known) merged with Syndicate Capital Trust, and in 1999 withCLM. By the end of 1999 it had net assets of £227.5 million and managed fivesyndicates with aggregate premium capacity of £391 million, making it one of thelargest Lloyd's listed groups at that time. In August 2001 it announcedsignificant losses from US liability underwriting, and in particular reinsurancebusiness. The Group's financial condition was further weakened by investmentlosses and the 11 September terrorist attacks. This was followed by losses fromthe Enron and WorldCom collapses and IPO laddering. By late 2003 a new management team had been appointed to reverse the decline inSVB's fortunes and to establish a new strategic direction for the Group. At itscore this involved containing the damage from legacy underwriting, mainly bysyndicates 1212 and 1241, while protecting and nurturing the ongoing business. The rehabilitation involved fundamentally changing the management of the run offof discontinued business lines; allocating scarce capital to optimiserisk-adjusted underwriting returns; selling SVB's stake in its UK regionalinsurance agency; and in its place setting up a wholly-owned UK regionalunderwriting business. In June 2006 this process reached an important milestonewith the formation of a new holding company, Novae Group plc, and the completionby Novae of a rights issue to capitalise NICL. Operating review Market structure and competitive position The non-life insurance industry offers indemnity protection ranging frompersonal lines (insuring individuals against damage to or loss arising fromtheir homes, vehicles and possessions) to retrocession (the reinsurance ofreinsurance). Distinctions are typically made between direct and reinsurancebusiness; between property and liability (or casualty); and between personal andcommercial lines. Novae operates principally in the commercial lines market. Its origins lie inliability insurance and its product mix continues to reflect this. Novae'sbusiness is predominantly direct, with inwards reinsurance business limited toevent-driven property and aviation catastrophe classes. Appetite forUS-domiciled risk is limited, and arises principally from property classes. Themean development tail is estimated at four years, down from six in 2000/01.Overall tail length is limited by avoiding liability reinsurance business andcontaining the proportion of business written on a losses occurring (as opposedto claims made) basis to under 20% of the whole. Novae operates two trading platforms: a Lloyd's business and an FSA-authorisedinsurance company. Individual underwriters may use either, making theirselection on the basis of market need and processing efficiency. In 2006 over90% of gross written premium was transacted by the Lloyd's platform and this isexpected to remain at over 75% into the medium term. The competitive landscape in which Novae operates may be analysed as follows: Lloyd's market participants 46 managing agents, with £14.8 billion of aggregate premium capacity in 2006, competing in a subscription market to underwrite large international risks typically rely on the Lloyd's rating and licence network to attract business that cannot be placed in local markets Major European reinsurers six major European entities such as Munich Re and Swiss Re offering reinsurance and retrocessional cover to international insurers financial stability, rating and market reputation are critical in winning and retaining business Bermudan and other specialist eight major Bermudan groups including ACE,insurers XL and the classes of 2001 and 2005 specialist pool underwriters such as GAUM and La Reunion Aerienne accepting major international risks on both a direct and reinsurance basis US property casualty insurers licensed (or "admitted") on a state by state basis range from monoline insurers focused on particular regions/lines of business to large international groups such as AIG and Chubb UK commercial lines insurers provide UK regional coverage and offer property, liability and motor insurance Axa, Allianz Cornhill, Norwich Union, RSA and Zurich; virtual insurers such as Towergate; and subsidiaries of Lloyd's groups such as Catlin Strategy and business objectives Novae's strategy remains to develop a specialist insurance business diversifiedby: Product: liability classes continue to account for around 65% of Novae's grosswritten premium, with the balance from short tail, property lines. Liabilityclasses are written on a direct rather than a reinsurance basis. Around 55% ofbusiness is sterling denominated and 40% US dollar denominated, of whichapproximately half is US business Market: following the formation of NICL, the Group has two operating platforms.This enables underwriters to write business in the most appropriate market.Large, international wholesale business which relies on the subscription marketis generally placed in Lloyd's, whereas UK regional, small and mid-sized risksare written, usually 100%, into NICL. Rating, security and frictional processingcost are also important for underwriters in deciding where to place individualrisks Method of distribution: both the Lloyd's business and NICL trade inintermediated markets. NICL has invested in electronic placement technology andthis is made freely available to brokers. 5% of NICL's business is now deliveredelectronically and this is expected to increase as the cost benefits become moreapparent to brokers and as the FSA continues to press for contract certainty atinception. Lloyd's too is investing in electronic placement but progress isinevitably slower in a subscription market Within this overall framework the Group's objectives for the two parts of itsbusiness are: Ongoing business: the ongoing business is charged with generating a cross cyclereturn in excess of the Group's cost of capital. Underwriting unit profitabilityis assessed after cost of capital and the residual economic value added is theprime determinant of unit bonus awards. The implications of increases in thecost base, and the volume/margin trade off, are well understood at unit level Discontinued Units: between 1997 and 2000 SVB underwrote a large volume of USliability business on both a direct and reinsurance basis. This business wasseriously under priced. Indications of future losses led to the August 2001trading statement. Novae is charged with managing the run off of this businessin the most financially advantageous and effective way for shareholders.Transactional solutions to accelerate the run off are under constant review,although the Board will only deal on terms that are economically rational forshareholders Wherever possible, these aims are pursued within explicit risk tolerances. Forexample, underwriting risk is managed within agreed Willingness To Lose andinvestment risk through a Value at Risk framework. Results for the 2006 financial year Profit before tax was £31.3 million, or £32.8 million before exceptionalprofessional costs involved in the scheme of arrangement and formation of NICL(2005: loss £13.9 million). Although profitability continues to be distorted bylegacy effects, the 2006 results represent the highest level of profitability inthe nine years in which Novae and its predecessor entities have been listed. Earnings per share were 3.8p, or 4.1p before exceptional professional costs(2005: loss 4.8p). Net assets per share as at 31 December 2006 were 33.0p, andnet tangible assets per share were 32.0p (2005: 31.2p and 28.9p respectively).The headline combined ratio at the 100% level was 81.4% (2005: 104.6%). Combined ratio analysis - 100% level 2006 2005 2004 2003 Claims ratio 47.3% 71.5% 56.3% 66.0% Acquisition 22.2% 19.4% 24.9% 23.8%cost ratioOperating cost 11.9% 13.7% 7.7% 9.8%ratioExpense ratio 34.1% 33.1% 32.6% 33.6% Combined ratio 81.4% 104.6% 88.9% 99.6% Combined ratio analysis - at Novae ownership level 2006 2005 2004 2003 Claims ratio 48.1% 70.9% 57.0% 60.5% Acquisition 22.6% 19.4% 24.8% 22.4%cost ratioOperating cost 11.8% 13.8% 7.6% 10.1%ratioExpense ratio 34.4% 33.2% 32.4% 32.5% Combined ratio 82.5% 104.1% 89.4% 93.0% Business structure and reporting framework Whilst the Group now has two operating platforms, risk selection, exposuremonitoring and reinsurance buying are carried out centrally. The Group reportsits results by operating segment. The ongoing business is managed day-to-day at unit level. Business plans aredeveloped at unit level and within explicit underwriting, capital and resourcelimits unit heads are given flexibility to pursue those plans. Unit contributionto the Lloyd's business and NICL are aggregated in setting plans and assessingperformance. Specialty Specialty lines is Novae's largest business segment. It includes financialinstitutions, professional indemnity and management liability, where Novaeenjoys a strong leadership position. The largest individual risk lines writtenthroughout the Group are on financial institutions business. These tend to befor UK and international banks, reflecting a cautious approach to US exposure. The formation of NICL extends this Specialty lines franchise. Regionalprofessional indemnity and medical malpractice business bring smaller risks thanthose typically seen at Lloyd's and they form key components of NICL's business.Historically, one of the impediments to writing small and mid-sized business wascost-effective distribution. NICL's ability to source such businesselectronically is an important part of its offering. Novae has gradually extended its historic Specialty lines franchise. Politicalrisks and credit business was introduced in 2000 and terrorism was added during2007. The fine art and specie business has been reorientated since 2003 and in2005 was supplemented by a cargo account. The Group will continue to seekopportunities to extend further its Specialty lines franchise while recognisingthat the established core business is fundamental to future profitability. The insurance risk appetite for Specialty business is well-defined and paysparticular attention to various hypothetical loss scenarios. The risk ofmultiple exposures resulting from a corporate collapse following a merger ismodelled with the maximum net loss potential for this extreme event capped at£30 million. In recent years Lloyd's has introduced its own professional linesdisaster scenarios which generate a considerably lower maximum potential loss.In the political risks sphere the maximum net loss is set at £20 million for themost severe modelled scenario. The segment's 2006 combined ratio at the 100% level was 77.7% (2005: 100.0%).Including investment return segmental profit was £43.4 million (2005: £8.1million), of which £35.2 million (2005: £6.4 million) was attributable to Novae. In earlier years, including 2005, overall Specialty results were adverselyaffected by reserve development on business transacted several years ago,particularly US professional indemnity business. Such prior year movements werematerially lower in 2006, enabling the underlying quality and profitability ofthe business transacted in recent years to be much more apparent. 2006 2005 £m £m Gross written premium 158.6 111.5Net earned premium 129.5 109.1Net claims incurred 60.2 75.1Segment operating expenses 39.9 18.7Profit attributable to Novae 35.2 6.4Claims ratio (%) 46.5 68.8Expense ratio (%) 31.2 31.2Combined ratio (%) 77.7 100.0 Property Novae underwrites Property business on both a direct and reinsurance basis.Reinsurance business, which is almost exclusively focussed on catastrophe lines,accounted for 75% of segmental gross premium income in 2006. Dramatic rateincreases in the reinsurance account outweighed the impact of action taken toreduce peak exposures. Catastrophe reinsurance will remain the single largest part of the Propertysegment. However, following the recruitment of two highly regarded teams in 2006the direct units will account for an increased proportion of the segment'sincome in 2007. The new teams are focussed on international property businessand UK commercial and residential property facilities respectively. Thiscomplements the US facilities business, where careful selection of coverholdershas been rewarded by a much lower than expected impact following the USwindstorm losses in 2004 and 2005. Much of the business written in this segment is exposed to natural catastrophes.A variety of extreme scenarios are modelled to ensure aggregates remain withindefined risk tolerances. For many scenarios the maximum net loss is £30 millionor $54 million. In Japan these limits would apply to a current day cost of arepeat of the Great Kanto earthquake (1923) or Typhoon Vera (1959). It alsoapplies to windstorms affecting the UK and Europe, where a repetition of thesevere storms of 1987 and 1990 is reviewed, as well as a specific European stormscenario set by Lloyd's. The Group is prepared to tolerate a larger monetary loss than this base amountfor events of exceptional severity. For example, risk tolerance rises to $75million for a $50 billion insured loss in respect of a Californian earthquake ora loss in excess of $60 billion from a windstorm in Florida. The only scenariooutside the US where the Group has a property net risk tolerance above £30million relates to very extensive UK flooding, such as a repeat of the 1953floods in East Anglia. By virtue of its catastrophe exposures, the Property segment will inevitablyshow marked variability in claims experience, and thus profitability, from yearto year. After the devastating impact of Hurricanes Katrina, Rita and Wilma,2006 was abnormally benign. Partially offsetting this were the additionalreinsurance costs incurred to cover the run off of Fusion and US open marketbusiness, as well as some underlying deterioration on the Fusion account.Consequently the combined ratio was 81.4% (2005: 137.8%) and the profitattributable to Novae was £11.6 million (2005 loss: £29.9 million). 2006 2005 £m £m Gross written premium 52.1 71.0Net earned premium 35.7 95.3Net claims incurred 11.8 98.3Segment operating expenses 15.4 26.0Profit attributable to Novae 11.6 (29.9)Claims ratio (%) 33.1 103.2Expense ratio (%) 48.3 34.6Combined ratio (%) 81.4 137.8 Liability This segment comprises both non-marine general liability business and theGroup's marine liability business. It comprises risks written on an occurrenceform which extends the development tail. This is countered by writing anaccident-orientated account that has only limited exposure to disease claims. The bulk of the non-marine business in 2006 was derived from the UK. It includesbusiness under facilities, largely written into the Lloyd's syndicate, and openmarket business, now being written mostly into NICL. A wide range of trades andoccupations is written but with the common feature that they all tend to besmall risks. Consistent with a desire to restrict potential exposure to diseaseclaims, large industrial risks are deliberately avoided. In 2007 this UK focus will be supplemented by the development of aninternational general liability account following recruitment of a highlyregarded team in February. This will bring some exposure to larger risks writtenon both a primary and an excess basis. It is likely to be less attritional thanthe UK account but the potential volatility implied by exposure to large losseswill be moderated by reinsurance. It will create a more balanced businessprofile for the non-marine liability account. The Group's marine liability business includes a significant element ofland-based marine-related accounts branded as Puffin policies. However, thelarger component of the marine liability account is more conventional marinebusiness. This includes reinsurance for protection & indemnity clubs and otherbusiness relating to vessel operations or offshore activity. Risk appetite for the segment is expressed in part by the maximum proportion oftotal premium income the Group is prepared to write. In terms of monetary loss,the Group models event-orientated disasters as well as generic reserving issuessuch as a change in Ogden tables. Examples of events modelled include thecollapse of a stadium at a rock festival and an oil rig disaster comparable toPiper Alpha (1988). The maximum net impact from such a catastrophic event is setat £20 million based on an extremely pessimistic assessment of the possiblescale of involvement. The 2006 combined ratio was 92.9% (2005: 85.7%) and the contribution to profitwas £7.3 million (2005: £11.5 million). As in 2005, this included benefit fromprior year reserve releases. 2006 2005 £m £m Gross written premium 48.7 40.7Net earned premium 45.2 61.0Net claims incurred 25.8 30.8Segment operating expenses 15.7 17.4Profit attributable to Novae 7.3 11.5Claims ratio (%) 57.0 50.5Expense ratio (%) 35.9 35.2Combined ratio (%) 92.9 85.7 Aviation & Marine With the principal component of Marine activity included in Liability, it is asmall account of hull and marine war business that is included in the Aviation &Marine segment. In 2006 this was substantially boosted by the establishment ofan energy book. Notwithstanding this growth and diversification, the aviationreinsurance account remains the single largest component of the segment. Aviation reinsurance has continued to enjoy a favourable claims environment in2006, although there were a number of small loss events in the second half. As aresult, profits in 2006 are lower than the exceptional profits reported in 2005which benefited from the unwinding of earlier timing differences, although theoverall contribution from Aviation remains significant. Aviation reinsurance is modelled on the assumption of a normal level of lossactivity. The Group considers a variety of possible disaster scenarios. For amid-air collision between two aircraft a maximum net loss potential of £30million has been set. Reflecting a cautious approach towards terrorism exposurein the aviation reinsurance market generally, scenarios which assume terroristattacks involving several aircraft result in a net loss considerably less than£30 million. The energy account has enjoyed a successful first year. A good mix of businesshas been secured on attractive terms while claims experience over the period hasbeen favourable. This was only partially offset by a less favourable claimsexperience last year on hull business, where the small size of the account canbring volatility from year to year in the context of a satisfactory longer termperformance. The Group's loss appetite for marine business (including energy) is set belowthat for aviation reinsurance. For a particularly severe in-house marinecollision scenario the maximum net loss has been set at £20 million. For othermarine scenarios, including those required by Lloyd's, the limit is set at £16million. Similar constraints also apply to the energy account. In the case ofenergy business possible aggregation with property business in the event of Gulfof Mexico windstorm activity is considered, ensuring action is taken to ensurethat the possible aggregation with property business in the event of Gulf ofMexico windstorm activity does not produce a loss in excess of the $75 millionceiling set in relation to severe US property scenarios. The 2006 combined ratio was 80.0% (2005: 38.8%) and the contribution to profitwas £8.0 million (2005: £14.7 million). 2006 2005 £m £m Gross written premium 47.5 25.8Net earned premium 31.4 22.9Net claims incurred 16.5 1.9Segment operating expenses 9.7 6.3Profit attributable to Novae 8.0 14.7Claims ratio (%) 52.5 8.1Expense ratio (%) 27.5 30.7Combined ratio (%) 80.0 38.8 Discontinued Units The Discontinued Units are made up of the liability reinsurance, healthcare andthird party liability accounts. When SVB operated a multiple syndicate strategy,these units were represented on more than one syndicate and multiple lines werefrequently put down on individual inwards risks. The financial damage from theDiscontinued Units is largely concentrated in syndicates 1241 and 1212 (thelatter reinsured to close into Syndicate 1241). Reserving for the Discontinued Units has proved problematic as the quality,volume and timing of information from cedants and assureds has been poor and thecontractual terms on which the business was written were extremely weak.Conventional actuarial modelling, aiming to arrive at the best estimate ofreserves required, has repeatedly under-estimated the true position. As aresult, an exceptional provision was established as at 30 June 2004 to absorbpotential reserve movements over and above best estimate. The provision was setat £103.6 million, being the aggregate of selected top down assessments on asignificantly more pessimistic basis. The overall pattern of incurred development continues to show stability by thesixth year following inception. However, some uncertainty remains and individualcalendar quarters can reflect one-off events such as claims audits andcommutations. In 2004 the Discontinued Business Unit ("DBU") was formed to focus exclusivelyon the run off of the Discontinued Units. The DBU has ten dedicated staff andits 2007 budgeted cost base is £2.2 million (2006: £2.5 million). Includingother resource requirements, the total annual cost of managing the run off from2002 and prior is over £4.0 million. The estimated total cost of the DBU betweenits formation in late 2004 and the end of 2007 is over £13 million. In addition to reserve movements and run off costs, the Discontinued Units alsorequire solvency capital support. Our current capital assessment under Lloyd'srules for Syndicate 1241 is £78.5 million. Further capital is required tosupport Syndicate 1007's 2002 run off year. After diversification credit, theaggregate amount of capital required to support the 2002 underwriting year is ofthe order of £40-50 million which at Novae's 2007 cost of capital of just over10.0% represents an economic burden to shareholders in 2007 of some £5 million. Thus the total economic damage from the Discontinued Units, including theunutilised portion of the exceptional provision, is over £250 million, of whichover £200 million has been recognised since the arrival of the new managementteam. This compares to the highest level of audited net assets recorded by SVBof £227.5 million as at December 1999. Novae has also withdrawn from a number of other classes of business. Some, suchas kidnap & ransom, are relatively modest in relation to the ongoing businessand the Group withdrew because the risk/reward profile and growth outlook werenot attractive. Others such as marine excess of loss, which Novae ceased in2002, continue to give rise to occasional late reporting of inwards claims, insome cases dating back to the 1990s. The most damaging area outside the Discontinued Units has been US dollarprofessional indemnity. The Group scaled back its presence in this class in2001, but because coverage was often offered on a multi-year basis and withextended reporting periods, a clean break was not possible. Cumulative netreserve movements from US dollar professional indemnity since 2002 are some $43million. Although such reserve movements are material in terms of the level ofongoing profitability, this class has not been added to Discontinued Units tomaintain clarity and consistency of reporting. Novae continues actively to pursue transactional solutions to the run off of the2002 year. A financial framework has been used to assess specific proposals.Discussions continue with a range of potential partners, and Lloyd's and the FSAare regularly briefed. The Board will not, however, do a deal at an irrationalprice. Trading environment and outlook Novae monitors rate change on renewal business. Adjustments are made to capturechanges in deductibles and terms and conditions, and also to take claimsinflation into account, particularly in liability classes. Novae's rating index for the seven years to December 2006 is as follows: Class 2006 2005 2004 2003 2002 2001 2000 Specialty 243 267 292 281 212 125 100Property 213 157 158 165 159 118 100Liability 199 204 207 196 171 117 100Aviation 278 280 295 304 284 132 100& Marine Whole 215 217 230 228 193 123 100account In July 2006 the Group pointed out that the rating environment had remained verystrong for an extended period, and that some bifurcation in the market wasbecoming evident. There is no doubt that rates in many liability classes aresoftening, albeit gradually and from a high level. Rates in the direct aviationmarket, in which Novae does not operate, are softening sharply although to datethere has been greater pricing discipline in the reinsurance market. Propertyand energy classes that bore the brunt of 2005 US windstorm losses havestrengthened sharply. Other property classes have shown a mixed experience overthe last 12 months. Novae's central business assumption is that rates will soften across most linesof business in 2007. Detailed unit plans anticipate real rate reductions of3-4%. Units are expected to remain profitable after cost of capitalnotwithstanding this rate softening assuming normal loss experience, as volumeis expected to be given up to protect the loss ratio. As well as renewal rates, two other metrics are measured to assess tradingconditions. First, terms and conditions are subject to rigorous review. Second,resources in premium credit control have been increased and the Group is alertto slow payment of premium. Notices of cancellation are issued for non-paymentof premium. Notwithstanding the rating environment, Novae continues to develop anddiversify. In the past year the Group has entered three new classes: marinecargo, energy and terrorism. The direct property business has been restructuredand expanded. Increasing interest is coming from teams and individuals keen tocome to Novae. Where the Group is confident that new teams will cover their costof capital, and where the individuals concerned are high quality andentrepreneurial, Novae has no hesitation in employing them. A number of excitingproposals are in the due diligence stage. Risk management Day-to-day risk management is delegated by the Board to the Risk Committee,which is chaired by Jeremy Adams. A formal report from the Risk Committee isincluded in the annual report. Risk is divided into six principal and two subsidiary pillars. The six principalrisk pillars are as follows: • Insurance risk: made up of underwriting risk (the risk that currentbusiness is under-priced in the light of claims experience) and reserving risk(the risk that reserves may prove inadequate) • Market risk: the risk that financial assets may fall in value • Liquidity risk: the risk that liabilities may exceed available cashresources • Credit risk: the risk that intermediaries, assureds or reinsurers maynot be able or willing to meet their liabilities as they fall due • Operational risk: the risk that the failure of a management control orprocess may give rise to operational disruption and/or financial loss • Group risk: the risk that an intra-group conflict of interest mayarise, or that the financial condition or operational conduct of a subsidiarymay produce systemic effects elsewhere The second order risk pillars, which are more subjective, are reputational lossand regulatory change or intervention. Risk is mitigated by the design and operation of effective controls. The controlenvironment is subject to continual internal review. In addition, both Lloyd'sand the FSA periodically publish best practice guidance and where relevantimprovements are made reflecting such advice. Gross risk is mitigated by controls, with capital deployed to absorb net risk.Where net risk is low (either because gross risk appetite is limited or becauseeffective controls reduce volatility, or a combination of the two) limitedcapital is required. Where net risk is high, significant capital is required.When planning risk budgets, appetite in areas other than insurance-related riskis very limited. Regulation and compliance Three Novae subsidiaries (NICL, the Lloyd's managing agency and the Lloyd'sservice company) are regulated by the FSA. The Group's managing agency andservice company are also subject to the capital regime, franchise guidelines andother detailed rules of Lloyd's. In addition, the Group as a whole is subject tothe Insurance Groups Directive. The natures of the FSA and Lloyd's regimes are subtly different. Both the FSAand Lloyd's impose capital requirements on individual entities. The FSA'sIndividual Capital Assessment regime ("ICA") is designed to ensure that a givenbusiness has a 99.5% probability of not failing in the subsequent twelve months.Lloyd's uses a similar approach to the ICA but loads the base capitalrequirement to support a higher rating than the BBB+ to which the FSA'srequirement is calibrated. The FSA's inspection regime focuses on periodic ARROW visits. The most recentARROW visit took place in January 2007. In addition, the FSA undertakes thematicreviews on individual underwriting areas and business processes. Lloyd'scompliance is more rules-based, with detailed quarterly and annual reporting. Inaddition, the Lloyd's Franchise Performance Directorate ensures appropriateunderwriting and claims standards are maintained. During 2006 a new Compliance Officer joined the Group and the role of ComplianceAssistant was created. The Internal Audit team is made up of three staff.Together with the Company Secretariat, there are seven employees in thecorporate centre focussing on assurance and compliance. Customers and intermediaries Novae operates in intermediated markets serviced by brokers. It is dependentupon brokers to provide business. The leading international brokers account forthe majority of premium income, although small specialist brokers are importantin individual niche markets. Brokers are facing operational and financial challenges in part due to theservicing requirements of run off business. In addition, the direct regulationof UK insurance brokers by the FSA is increasing focus on areas such as contractcertainty at inception. Some of the servicing roles which brokers historicallyperformed are now reverting to underwriters, with cost and resource implicationsfor insurers including Novae. Following the May scheme of arrangement, all active subsidiaries changed theirname to include "Novae". People People are a critical factor in corporate success. As at December 2006 Novae had209 employees functionally deployed across the Group as follows: 2006 2005 Underwriting 94 87Claims and reinsurance 43 39Finance and actuarial 33 35Operations 32 33Internal audit, 7 5secretariat and complianceTotal 209 199 Emphasis is placed on training and development, not only for regulatory reasonsbut because the rate of product development and legal change makes itcommercially vital. £89,000 was spent on professional development in 2006,equivalent to £425 per employee. Staff turnover is a key indicator of the health of the business. Some staffturnover is important in providing fresh thinking; however, excessive turnoverleads to instability and loss of corporate knowledge. Staff turnover in 2006 was13.8%, implying average tenure of over seven years. One of the drivers behind turnover is staff compensation. Novae's generalapproach is to pay market comparable salaries, supplemented by annual bonusesand equity incentives. Bonus schemes set specific targets for each employee withthe potential for bonuses to be a material, and in some cases very material,component of total compensation. The bonus pool is derived principally fromprofits after cost of capital. Participation in equity incentive schemes isspread widely across the business with over 90 members of the 2005 LTIP. Capital As at December 2006 the Group had £326.0 million of gross capital employed asfollows: 2006 2005 £m £m Equity capital 239.8 112.4Non-equity capital 86.2 105.1 Gross capital employed 326.0 217.5 Funds at Lloyd's support aligned underwriting capacity of £338.4 million.Excluding the 2002 and prior solvency deficit of £84.1 million, the 2007 Fundsat Lloyd's requirement is £198.6 million, which represents 59% of alignedcapacity, down on 82% in 2005. NICL remains over capitalised in relation to itscurrent level of underwriting but this level of support is commerciallyimperative to obtain the security rating required by brokers. Novae is also subject to the capital requirements of the Insurance GroupsDirective. The IGD capital requirement is approximately £100 million. Novae'sadmissible capital based on draft calculations is expected to be around £200million, resulting in a significant surplus. The Group will always report somesurplus given Lloyd's rating ambitions and capital regime. In addition NICL'scapital is not yet fully deployed as it builds scale. Nonetheless, the capitalposition is an indication of strength and demonstrates the extent of Novae'srecovery over the past three years. Managing the mix and duration of capital is key to delivery of shareholdervalue. The Group's regulatory capital requirement increased substantiallybetween 2000 and 2005, and it was compelled to employ available capitalregardless of cost to survive. As Novae has returned to health its regulatorycapital burden has eased and it has replaced distressed forms of capital withmore conventional equity and bank finance. One of the considerations in managing capital resources is the extent and scaleof short term capital fluctuations. Were a major loss to affect the Group's USproperty reinsurance account, for example, Novae would be required to fund thisloss gross for US regulatory purposes, as well as fund the resulting solvencydeficit within its Lloyd's business. The Group's capital resources must besufficiently flexible to meet such solvency spikes. In the absence of unforeseen circumstances Novae intends to recommend thatshareholders approve the payment of a dividend at the Annual General Meeting tobe held in the second quarter of 2008. The amount of that proposed dividend willbe determined in part by profitability for the year ended December 2007. The Group intends to review other options to maximise shareholder valueincluding where appropriate buy backs of ordinary shares or convertible bonds. Security rating Financial strength and claims paying ability are key factors for insurancebuyers. Competitive position is therefore heavily influenced by rating agencyassessment. Novae is no exception with both of its underwriting platforms thesubject of external rating. The Lloyd's market is rated by three leading agencies: Standard & Poors: A (Strong), outlook stable AM Best: A (Excellent) Fitch: A (Strong) Novae's Lloyd's business is separately rated by Standard & Poors, AM Best andMoody's. Moody's and Standard & Poors have recently improved their ratings,following growing evidence that the Group's troublesome underwriting legacy iscontinuing to fade. The current ratings of Novae's Lloyd's business are asfollows: Standard & Poors: LSA 2+, outlook stable AM Best: A (Excellent) Moody's: IFRS A3 good, outlook positive NICL is rated as A - (Excellent) by AM Best. Business infrastructure Novae operates under a one business, two platforms philosophy. Support servicessuch as claims and reinsurance are managed on a Group basis. The Group structure has been further refined. The number of corporate entitiesis currently 11, down from 61 three years ago. Of these seven are active andfour are non-trading. No further corporate reorganisations are currentlycontemplated. In July 2006 all employees and key operating assets were transferred to NovaeManagement Limited, a central infrastructure company. This allows fullimplementation of the one business, two platform philosophy, with users chargedfor group services. This arrangement is working well, with operational andfinancial benefits accruing as anticipated. Lloyd's consented to the merger of Syndicates 1007 and 2147 for the 2007 year ofaccount in September 2006. The merged syndicate is numbered 2007. It has £360.0million of premium capacity, of which £338.4 million, or 94%, is provided byNovae. The goal of consolidating all current underwriting into one syndicate,down from five, has therefore been achieved. It remains Novae's aim to acquirethe capacity provided by a single third party corporate (£20.0 million) and theremaining 16 names (£1.6 million) as soon as possible but only on terms that areeconomically rational. The May 2006 scheme of arrangement In March 2006 the Group published proposals to create a new holding company viaa scheme of arrangement; and conditional upon the Scheme becoming effective, tocapitalise NICL with the proceeds of a rights issue. This series of transactionsachieved Novae's strategic aim of diversification by market. It had three otherimportant effects. First, the new holding company and NICL sit outside theLloyd's covenant and charge. Second, the scheme allowed Novae to return to thebanking market on normal commercial terms. Finally, an opportunity was taken tore-brand the Group. Business process improvement Significant improvements have been made to automate and accelerate businessprocesses and reporting. As well as generating operational efficiencies,automation initiatives have improved the control environment and reduced therisk of manual error. Management information has been restructured across the Group. Performanceindicators and risk triggers have been set for underwriting units and supportfunctions. Major investment has been made in underwriting and claims process improvement,involving electronic data transfer, contract certainty and claims management.NICL is leading the Group's effort at binding insurance contracts electronicallyand 5% by volume of NICL's business is now transacted electronically. Financial review Capital management and cost of capital Novae deploys capital only where the expected risk-adjusted return exceeds itshurdle rate. Unit business plans assess how much capital is required to supportthe agreed level of underwriting; unit performance is then measured on abilityto generate returns greater than the cost of that capital. The hurdle rate is set at a small premium to the estimated pre tax weightedaverage cost of capital ("WACC"). The WACC is calculated by applying the CapitalAsset Pricing Model to the capital stack assembled for each financial year. In2006 the WACC was 10.4% and the hurdle rate was 12.5%. 2006 out turn and return on capital Profit before tax was £31.3 million, or £32.8 million before exceptionalprofessional costs involved in the scheme of arrangement and formation of NICL(2005: loss £13.9 million). Financing costs were £14.0 million, producingoperating profit before exceptional costs of £46.8 million (2005 operatingprofit before gain arising from the sale of the stake in Fusion: £2.9 million). Average equity capital employed during 2006 was £182.7 million; average grosscapital employed was £278.3 million (2005: £120.2 million and £244.5 millionrespectively). Return on gross capital employed was £46.8 million, equivalent to a pre taxreturn of 16.8%. Return on equity capital employed was 18.0%, exceeding Novae'shurdle rate for 2006 of 12.5%. 2006 2006 2005 2005 Equity capital Gross capital Equity capital Gross capital employed employed employed employed £m £m £m £m Profit / (loss) 32.8 32.8 (17.9) (17.9)before tax andexceptionalitemsFinancing costs - 14.0 - 20.8 Operating 32.8 46.8 (17.9) 2.9profit Average equity 182.7 182.7 120.2 120.2capitalemployedAverage debt - 95.6 - 124.3capitalemployed Average gross 182.7 278.3 120.2 244.5capitalemployed Return on 18.0% 16.8% - 1.2%capitalemployed Capital base and 2007 hurdle rate As at 1 January 2007 Novae had equity capital employed of £239.8 million anddebt capital employed of £86.2 million. The WACC of the 2007 capital base iscurrently estimated to be 11.3% and the hurdle rate has been set at 12.5%. The cost base Excluding cost of capital, the budgeted cost base in 2007 is £43.3 million(2006: £45.2 million). Of this £10.6 million are Lloyd's costs includingsubscriptions, levies and processing costs, over which the Group has limitedcontrol (2006: £11.3 million). Controllable costs of £32.7 million (2006: £33.9million) are made up as follows: 2007 2006 £m £m Staff costs including 20.6 22.4salaries, nationalinsurance and incentiveawardsEstablishment costs 3.6 3.4IT costs 2.9 2.7Professional costs 3.3 3.0Other 2.3 2.4Total controllable costs 32.7 33.9 Three fundamental changes have been made to the cost base. First, the sale ofFusion in November 2005 led to a significant reduction in the controllable costbase. This was timely as rates in the UK commercial property market started tosoften. Second, the cost base has been rebalanced, cutting out unnecessaryexpense and redeploying savings to meet either commercial or regulatoryrequirements. It is important that centres of excellence such as the DBU arebroadly contained within the cost base. Third, Novae has moved from a silostructure, in which support functions could be duplicated between syndicates andcorporate entities, to one where such resources are grouped together and chargedout on a user pays basis. Balance sheet structure Novae's gross balance sheet total as at December 2006 was £1,529.9 million(2005: £1,697.7 million). On the asset side of the balance sheet 82% of grossassets were accounted for by investments, cash and reinsurance contracts; on theliability side 77% by insurance contracts. The balance is made up ofinfrastructure assets (tangible and intangible fixed assets); working capital(debtors, creditors and tax); and debt and equity capital. The major balance sheet items are individually analysed below. The level ofinfrastructure assets is expected to remain broadly constant, reflecting thecontinued amortisation of syndicate capacity rights offset by capitalexpenditure, mainly on IT. The amount of working capital employed at aparticular accounting reference date reflects the underlying monetisation ofinsurance flows, and in particular the rate at which underwriting profits andlosses are settled. Investments As at 31 December 2006 Novae had financial assets of £827.9 million (2005:£799.3 million). Including third party capacity, financial assets under Novae'scontrol were £918.6 million (2005: £861.2 million). Novae's financial assets are invested in four separate pools: Lloyd's business - Funds at Lloyd's: £226.3 million of solvency capital or Fundsat Lloyd's (2005: £239.0 million). 75% of this pool, which is managed by CreditAgricole Asset Management, is in sterling and the balance in US dollars. Half isheld in cash and the balance in high grade corporate bonds, principallysovereign and quasi-sovereign issuers Lloyd's business - Premium Trust Funds: £462.3 million of insurance workingcapital (2005: £544.7 million). Trust fund balances, which are managed byInsight, Invesco and Weiss Peck & Greer, are generally held in the currencies inwhich premiums emerge except where US and other local regulators require a grossfunding position to be maintained. Assets are held exclusively in short durationinvestment grade bonds NICL: £98.2 million (2005: nil). These assets, which are invested exclusively inshort duration investment grade sterling bonds and cash, are managed by CreditAgricole Asset Management and Invesco. Outside the Lloyd's framework, solvencycapital and insurance working capital is managed on a combined basis Corporate cash: £41.1 million (2005: £15.6 million). Corporate cash not requiredelsewhere in the Group and outside the regulated businesses is retained insterling and managed by Royal London Cash Management, Barclays and Lloyds TSB.RLCM runs a high quality certificate of deposit mandate, with Barclays andLloyds TSB accepting short term deposits Novae retains a low risk investment policy. A neutral duration benchmark is 2.0years, and throughout 2006 actual duration was considerably lower. Holdings maynot be taken in instruments rated lower than A+ Standard & Poors equivalent.Managers invest on the basis of an explicit total return target for eachcalendar year and are assessed on their ability to meet this target. Overallrisk is limited by setting a 12 month Value at Risk limit of 1.0% at a 90%confidence level. Managers' expectations for investment return in 2007 are currently as follows: Lloyd's business - Funds at Lloyd's: 5.1% Lloyd's business - Premium Trust Funds: 4.9% NICL: 5.3% Corporate cash: 5.0% Day-to-day oversight of Novae's financial assets is delegated to the InvestmentCommittee, which is chaired by Oliver Corbett. The formal report of theInvestment Committee is set out in the annual report. Reinsurance contracts Reinsurance is a form of hedging designed to mitigate loss from peak events.Reinsurance contracts are made up of two components: reinsurers' share ofunearned premium reserve and collections under reinsurance contracts. Novae has had a large reinsurance collection balance for several years. This isa result of very heavy use of reinsurance as a trading strategy between 1997 and2002, combined with the aggregation effect of several years of high claimsactivity in a business with an extended settlement tail. In the last 12 months,collections under reinsurance contracts have fallen by 28%. In 2003 collection of reinsurance was in some disarray. Although exposure toinsolvent reinsurers was limited, experience demonstrated that willingness topay was as important as ability to pay. Moreover, as claims are paid gross andreinsurance collected separately, cash flow was deteriorating as olderreinsurance collections were failing to settle. As a result, a major management initiative began in 2004 to analyse overduedebtors in greater detail and to take specific action to collect cash. As aresult, net of excluded items, reinsurance collections more than 60 days overduehave fallen from £38.6 million in 2004 to £1.7 million by December 2006. Amountsoverdue by 365 days or more fell from £12.0 million to under £1 million. Insurance contracts As at 31 December 2006 insurance contracts amounted to £1,176.3 million (2005:£1,461.1 million), and were by far the largest item on the liability side of thebalance sheet. The insurance contracts balance is made up of three components. First, grossreserves on notified claims and claims incurred but not reported ("IBNR"). Theserepresent liabilities that Novae is likely to have to settle gross, and whereappropriate subsequently mitigate through outwards reinsurance collections.Gross claims reserves amounted to £1,027.4 million (2005: £1,278.2 million), or87% of insurance contracts as a whole. The next largest component is unearnedpremium reserve. This reflects premium written and in most cases cash receivedbut where income is deferred until a later accounting period. Unearned premiumreserve represents business written but earned in future accounting periods. Ina hard market environment, it indicates the quantum of well rated business to beearned in the future. As at 31 December 2006, the unearned premium reserve was£136.1 million, compared to £155.8 million in 2005. The smallest element ofinsurance contracts is the unutilised portion of the exceptional loss provision.This was £12.8 million at the year end (2005: £27.1 million). The rate at which gross claims are running off is an important indicator of riskin the business. The volatility in gross reserves is concentrated in businesswritten in 2002 and prior, which years remain open for Syndicates 1007 and 1241.The gross reserves and population of claims from lead business written by thesesyndicates in 2002 and prior have developed as follows: 100% level 2006 2005 Total gross reserves £317.3 million £378.0 millionYear-on-year reduction 16% - Total claims population 4,604 6,117Year-on-year reduction 25% - The value of open claims is heavily skewed towards a small number of largeitems. As at 31 December 2006, the profile of lead claims from 2002 and priorlead business was as follows: Gross claims 2006 2006 2005 2005value (100%level) £m Number £m Number Under £250,000 77.6 4,388 91.8 5,838£250,000-£1.0 83.1 173 112.8 224millionOver £1.0 156.6 43 173.4 55million Total 317.3 4,604 378.0 6,117 Inevitably these large claims are complex, and the outcome is heavily dependenton coverage and litigation issues. Resolution of the litigation surrounding thecollapse of Enron will have the biggest single effect on clearing large leadclaims from 2002 and prior. Important legal action was due before the US courtsin October 2006, but was subsequently deferred until April 2007. Novae's grossexposure is heavily reinsured, with net retentions reserved several years ago.However, settling these claims will unwind the Group's reinsurance asset. Thiswill in turn reduce the overall scale of the balance sheet and the regulatorycapital required to underpin it. Debt and gearing Novae has used both on- and off-balance sheet financial gearing to enhancereturn on equity. On-balance sheet debt comprises the 2008 convertible bond, USdollar denominated subordinated notes and conventional bank facilities.Off-balance sheet debt consists of bank and reinsurer letters of credit whichare treated as admissible assets by Lloyd's. The convertible bond and subordinated notes are listed. Both on- and off-balancesheet bank finance is fixed term and the lender's position is protected byrepresentations and covenants. Reinsurer letters of credit have been an essential part of Novae's capitalstructure during its rehabilitation and have the advantage of beingcovenant-free. In addition, once committed they are generally available forthree and a half years as the underlying Lloyd's year of account to which theyrelate runs off. The disadvantage from the Group's perspective is that, althoughamortised over three years, the cost of such capital is very expensive. AsNovae's Funds at Lloyd's ("FAL") requirement has started to fall, no reinsurerletters of credit have been renewed into 2007. However, the Income Statementwill continue to reflect the high cost of such finance in 2007 in relation toearlier Years of Account and, to a lesser extent, in 2008. Assuming the 1January 2007 capital base is unchanged throughout 2007, financing costs areexpected to be around £12 million. As Novae used current profits to repair the damage inflicted on its equity basefrom legacy underwriting, but at the same time faced a rising capitalrequirement, its level of financial gearing increased sharply between 2003 and2006. Following the scheme of arrangement and equity financing, together withthe gradual reduction in solvency capital as the legacy underwriting hasmatured, financial gearing has begun to fall. 2006 2005 2004 2003 2002 2001 £m £m £m £m £m £m Tangible net 232.4 104.1 119.8 201.3 125.4 118.0assets Reinsurer 20.0 60.0 90.0 116.0 76.0 76.0letters ofcreditBank letters 20.0 20.0 - - - -of creditSubordinated 19.7 19.6 19.5 - - -notesConvertible 46.5 45.5 43.9 47.9 - -bondTotal debt 106.2 145.1 153.4 163.9 76.0 76.0 Financial 45.7% 139.4% 128.1% 81.4% 60.6% 64.4%gearing(debt:tangible netassets) Financial gearing is not the only form of leverage in the balance sheet. Theother important sources of leverage include: Reserve gearing: ratio of gross reserves to tangible net assets Reinsurance gearing: ratio of reinsurance contracts (excluding UPR) to tangiblenet assets Catastrophe gearing: ratio of modelled loss from extreme catastrophe events totangible net assets On each of these measures the Group was significantly more highly geared thanits peers prior to the scheme of arrangement and equity financing. Thecumulative effect of such high gearing was to generate exceptional returns in aperiod of strong underwriting performance but to increase risk dramatically in aless benign underwriting climate. Working capital and liquidity Insurance profits and losses convert into cash flows with relatively littleleakage into areas such as fixed asset investment. The major swing factor is theperiod between profit recognition and cash release. Historically, Lloyd's operated a three year funded basis of accounting underwhich profits or losses would normally settle in June three and a half yearsafter the January in which the relevant year of account incepted. FollowingLloyd's transition to annual accounting, this regime has been partially relaxedand profits may be released earlier subject to meeting outstanding solvencydeficits from loss making underwriting. There is no such settlement delay inNICL, although the release of cash and payment of dividends requires the consentof the FSA under its continuous solvency regime. Novae was cash flow positive in 2006. The most significant non recurring cash inflow was the £103.7 million proceedsfrom the rights issue in June 2006. £100.0 million of this was subsequently downstreamed to NICL as solvency capital. Cash flows from the Group's Lloyd's operations were principally driven bymovements in solvency capital. FAL increased in June 2006 by £15.7 million. Thiswas met from Group resources. There was a subsequent £21.8 million release fromFAL in November 2006. Aside from movements in FAL there was a net cash inflowfrom the managed syndicates of £2.5 million. This represented distributions fromthe 2003 year of account for 1007 and 2147 of £64.0 million less cash calls onthe run off 2002 year of account for syndicates 1241 and 1007 of £61.5 million. As expected, NICL was cash flow neutral in 2006. Working capital is managed centrally and future flows are modelled andmonitored. In order to meet fluctuations in working capital, the Group has a £20million revolving credit facility. As at 31 December 2006 this was undrawn. Although Novae has reduced sharply the proportion of business it writes in USdollars since 2003, it continues to face a number of currency mismatches. Theseinclude translation of non sterling underwriting profits into sterling, asterling cost base with a multi currency income stream and the risk that reservemovements may arise in non sterling currencies but are matched from a regulatoryperspective by sterling solvency capital. Second order effects can arise wherebusiness is written in a minor currency, claims arise in that currency butreinsurance protection has been bought in a core currency such as sterling or USdollars. In order to mitigate potential currency mismatches Novae has adopted thefollowing strategy: Underwriting profits and losses are generally left in the currencies in whichthey emerge until at least month 24 following that of inception of the relevantunderwriting year, allowing the account in question to mature. At that stage aproportion of profits may be sold forward for sterling 25% of Novae's funds at Lloyd's are invested in US dollars to offset the effectsof any reserve deterioration in US dollars Claims management The claims management function is divided into four units each headed by anexperienced adjuster manager. The three continuing business claims units areProperty, Specialty/Liability and Aviation & Marine; the fourth is theDiscontinued Business Unit. All four adjusting units are supported by the claimsoperations team which undertakes processing, monitors non-moving claims andprovides management information. The claims operations team was expanded in 2006following the introduction of Lloyd's Claims Management Principles and MinimumStandards. The focus of claims activity during 2006 in the ongoing units was the propertylosses from hurricanes Katrina, Rita and Wilma, together with large Specialtyclaims such as losses arising following the collapse of Enron. Within theDiscontinued Business Unit further work was done on reviewing and auditing majorliability reinsurance contracts. A number of specific objectives have been set for claims management in 2007.First, Enron-related litigation is due to be heard in the US courts in spring2007. Assuming this process reaches a conclusion, the claims team will focus onresolving the related insurance issues. Second, further specific actions havebeen identified for the Discontinued Business Unit. Finally, claims managementhas been charged with maintaining the progress achieved in improving the speedof collection of outwards reinsurance. Tax The 2006 tax charge was £9.8 million, equivalent to 31% of profit before tax.This represents the partial utilisation of Novae's deferred tax asset and nocash tax is expected to be paid. The deferred tax asset represents credit given for past trading losses. Ineffect it recognises the ability of historic trading losses to shield currentand future profits. The benefit from creating the deferred tax asset has passedthough the Income Statement; as that asset is utilised the cost is taken throughthe Income Statement. The deferred tax asset carried forward at December 2006 is £31.6 million (2005:£41.4 million). Novae Group has limited the amount of deferred tax that can berecognised in relation to expected future profitability over a relatively shortperiod. The fact that actual losses exceed the amount that may be recognised asan asset does not mean that surplus losses are foregone. Surplus losses can bereinstated as an asset (with the associated gain taken to the Income Statement)if they can be utilised within a relatively short period. The amount of surpluslosses not currently recognised on the balance sheet is £24.1 million,equivalent to 3.3p per share. As well as trading losses, Novae also has £13.7 million of capital losses,equivalent to 1.9p per share (2005: £12.5 million). These are not recognised asan asset, but remain available to the Group to offset future capital gains. The tax charge is expected to remain in the range 30-32%. Expenses disallowedfor corporation tax purposes are relatively modest, being mainly accounted forby professional costs in relation to capital items, entertaining, depreciationand amortisation. In common with other insurers, Novae is unable to offset allof its input VAT and as a result suffers an irrecoverable VAT charge. Tax computations for all Group companies are agreed up to and including the 2004year end. Computations for the 2005 year end were filed in the fourth quarter of2006. International Financial Reporting Standards and accounting framework 2006 is the second year in which Novae's consolidated accounts have beenprepared under IFRS. No significant changes have been made from the basis onwhich consolidated accounts were prepared in 2005. Further development of the IFRS framework is underway. Some of the areascurrently under review, such as pension accounting, are unlikely to affect Novaeto any material extent. However, in the medium term a combination of IFRS and EUdirectives on the non-life insurance sector will lead to changes in the wayinsurance liabilities in particular are presented. Following a review by the Audit Committee, subsidiary companies' financialstatements continue to be prepared in accordance with UK GAAP rather than IFRS.This decision was taken on cost benefit grounds given the substantial additionaldisclosure required under IFRS and the volume and nature of disclosure availablein the Group's annual report. Annual General Meeting Following a recent change in company law, a separate document is now requiredformally convening Novae's 2006 Annual General Meeting. A circular convening themeeting is being posted to shareholders today. At the Annual General Meeting tworesolutions will be put before shareholders as special business, in addition tothe usual business considered at such meetings. The first resolution sets out a proposed amendment to Novae's Articles ofAssociation. This would increase the annual cap on non-executive directors'aggregate fees from £150,000 to £300,000. The existing cap was fixed some timeago and over the recent past Novae's difficulties have deterred potentialnon-executive directors from joining the Group. As Novae's rehabilitationcontinues, the Board wishes to have the flexibility to refresh its compositionby attracting top quality independent non-executive directors. The second resolution seeks shareholder consent for the introduction of a newLong Term Incentive Plan ("LTIP"). When the 2005 LTIP was approved byshareholders, it was on the basis that that scheme would only make two series ofawards, in January 2006 and January 2007. As a result, a new scheme is nowrequired, details of which are set out in the attached circular. The design andoperation of the new scheme has been discussed with Novae's major institutionalinvestors. Use of the operating and financial review This operating and financial review contains certain forward-looking statementswhich are made by the directors in good faith based on the information availableto them at the time of their approval of this review. Statements containedwithin the operating and financial review should be treated with caution due tothe inherent uncertainties, including economic, regulatory and business riskfactors, underlying any such forward looking statements. The operating andfinancial review has been prepared by Novae to provide information to itsshareholders and should not be relied upon by any other party or for any otherpurpose. 16 March 2007 Consolidated income statement for the year ended 31 December 2006 Note Year ended Year ended 31 December 31 December 2006 2005 £m £m Gross premium revenue 6 303.9 366.6 Less premium ceded to reinsurers 6 (83.1) (96.0) Net premium revenue 220.8 270.6 Fees and commission income 7 9.7 7.3 Investment income 8 32.9 25.8 Total revenue (net of reinsurance 263.4 303.7 payable) Gross claims incurred 9 (144.3) (350.0) Reinsurers' share of claims incurred 9 42.1 162.3 Net claims incurred (102.2) (187.7) Policy acquisition costs 10 (50.6) (53.2) Other operating expenses 11 (57.3) (62.9) Currency (loss) / gain on non-monetary (6.5) 3.0 items Operating profit 46.8 2.9 Profit on disposal of subsidiary 12 - 4.0 Financing costs 13 (14.0) (20.8) Cost of scheme of arrangement (1.5) - Profit / (loss) before income taxes 31.3 (13.9) Income taxes 14 (9.8) (3.2) Profit / (loss) for the year 21.5 (17.1) Attributable to: 21.5 (17.2) Equity holders of the parent Minority interest - 0.1 21.5 (17.1) Earnings per share 3 3.8p (4.8)p Basic earnings per share Diluted earnings per share 3 3.8p (4.8)p Consolidated balance sheet As at 31 December 2006 Note 31 December 31 December 2006 2005 £m £mAssets Property, plant and equipment 16 1.3 1.8Intangible assets 17 7.4 8.3Deferred acquisition costs 18 24.7 25.3Deferred tax assets 19 31.6 41.4Financial assets 21 587.0 579.3Reinsurance contracts 22 423.3 587.2Insurance and other receivables 23 213.7 234.4Cash and cash equivalents 24 240.9 220.0Total assets 1,529.9 1,697.7Liabilities Insurance contracts 25 (1,176.3) (1,461.1)Financial liabilities, due after one year 26- Convertible debt (46.5) (45.5)- Loan notes (19.7) (19.6)Insurance and other payables 27 (47.6) (59.1)Total liabilities (1,290.1) (1,585.3)Net assets 239.8 112.4Shareholders' equity Share capital 29 73.2 114.4Share premium 29 67.1 83.6Merger reserve 29 69.6 -Retained earnings 29 (130.8) (154.5) )Other reserves 29 155.2 63.4Equity component of convertible debt 29 5.5 5.5Total shareholders' equity 239.8 112.4Net asset value per share 33.0p 31.2pNet asset value per share excluding syndicate 32.0p 28.9pcapacity These financial statements were approved by the Board of Directors on 16 March2007 and were signed on its behalf by: P E Selway-Swift O R P Corbett Chairman Group Finance Director Consolidated statement of changes in equity for the year ended 31 December 2006 Share Share Merger Other Profit Equity Total capital premium reserve reserves and loss component of account account convertible bond £m £m £m £m £m £m £mFor the yearended 31December 2006:Profit for theperiod - - - - 21.5 - 21.5Movement intreasury shares - - - - 2.2 - 2.2Groupre-organisation (77.8) (83.6) 69.6 91.8 - - -Rights issue 36.6 67.1 - - - - 103.7Net increase / -(decrease) inequity (41.2) (16.5) 69.6 91.8 23.7 127.4As at 31December 2005 114.4 83.6 - 63.4 (154.5) 5.5 112.4As at 31December 2006 73.2 67.1 69.6 155.2 (130.8) 5.5 239.8 For the yearended 31December 2005:Loss for theperiod - - - - (17.1) - (17.1)Movement intreasury shares - - - - 1.5 - 1.5Net decrease inequity - - - - (15.6) - (15.6)As at 31December 2004 114.4 83.6 - 63.4 (138.9) 5.5 128.0As at 31December 2005 114.4 83.6 - 63.4 (154.5) 5.5 112.4 Consolidated cash flow statement Year ended Year ended for the year ended 31 December 2006 31 December 31 December 2006 2005 Note £m £m Profit / (loss) before tax 31.3 (13.9) Cash flow from syndicates (41.0) 32.7 Depreciation and amortisation 2.7 2.6 Unrealised gains on financial assets (0.8) (0.4) Employee equity incentives 2.9 1.6 Change in receivables less payables 3.1 42.5 Utilisation of exceptional loss provision (14.3) (40.0) Cash generated from operations (16.1) 25.1 - Interest paid (5.4) (5.2) - Interest received 14.4 12.4 - Income taxes paid - (1.1) Net cash from operating activities (7.1) 31.2 Cash flows from investing activities (511.6) (816.1) - Portfolio investment purchases - Portfolio investment sales 425.9 792.0 - Acquisition of intangible fixed assets (0.1) - - Acquisition of property, plant and (1.2) (1.5) equipment - proceeds from disposal of subsidiary, net 12 - 0.5 of cash and cash equivalents disposed of Net cash used in investing activities (87.0) (25.1) Cash flows from financing activities 109.8 - - Receipts from issue of equity - Expenses relating to issue of equity (6.1) - Net cash used in financing activities 103.7 - Movement in cash holdings 9.6 6.1 Movement in syndicate funds 11.3 22.5 Opening cash and cash equivalents 220.0 191.4 Closing cash and cash equivalents 240.9 220.0 Notes to the financial information 1. Significant accounting policies Novae Group plc is a company incorporated in England and Wales. In May 2006 pursuant to a Scheme of Arrangement under s425 of the Companies Act1985, a new parent company was introduced which is now called Novae Group plc.The previous parent company has been re-named Novae Holdings PLC. The introduction of a new holding company constitutes a group reconstruction andhas been accounted for using reverse acquisition accounting principles.Therefore, although the group reconstruction did not become effective until May2006, the consolidated financial statements of Novae Group plc are presented asif both companies had always been part of the same group. Accordingly, theresults of the Group for the year ended 31 December 2006 are shown in theconsolidated income statement and the comparative figures are also prepared onthis basis. The consolidated financial statements include the results of Novae Group plc andall its subsidiary undertakings (together referred to as the "Group") made up tothe same accounting date. The Group financial statements have been prepared and approved by the directorsin accordance with International Financial Reporting Standards as adopted by theEU ("Adopted IFRSs"). The accounting policies set out below have, unless otherwise stated, beenapplied to the Group consistently for all periods presented in this consolidatedfinancial information. (a) Adoption of IFRS In the prior year, IFRS 1 granted certain exemptions from the full requirementsof IFRS in the transition period: The exemption on pre 7 November 2002 options for share-based payments has beentaken The Novae Group has applied the business combinations exemption in IFRS 1. Ithas not restated business combinations that took place prior to the 1 January2004 transition date The exemptions for IFRS 4 - Insurance Contracts, IAS 32 - Financial Instruments:Disclosure and Presentation and IAS 39 - Financial Instruments: Recognition andMeasurement have not been taken as the Group has applied these standards inpreparing its comparative financial information. Novae has considered the impact of standards not yet effective and endorsed foruse in the EU; IFRS 7 (Financial Instruments: Disclosures), IFRIC 8 (Scope ofIFRS 2 Share-based payment) and IFRIC 9 (Reassessment of Embedded Derivatives)are expected to have no significant impact on the balance sheet or incomestatement. IFRS 7 will effect the level of disclosure within the notes whichform part of the financial statements. (b) Basis of preparation The financial statements are presented in pounds sterling unless otherwisestated. They have been prepared under the historical cost convention, asmodified by the revaluation of financial assets and financial liabilities atfair value through profit or loss. The preparation of financial statements in conformity with IFRS requiresmanagement to make judgements, estimates and assumptions that affect theapplication of policies and reported amounts of assets and liabilities, incomeand expenses. The estimates and associated assumptions are based on historicalexperience and various other factors that are believed to be reasonable underthe circumstances, the results of which form the basis of making judgementsabout carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates. The Groupmakes use of certain hedging contracts, to which it applies hedge accounting.The accounting policies set out below have been applied consistently to allyears presented in these consolidated financial statements. The estimates and assumptions are reviewed on an ongoing basis.Revisions to accounting estimates are recognised in the year in which theestimate is revised if the revision only affects that year, or in the year ofthe revision and future years if the revision affects both current and futureyears. (c) Basis of consolidation Subsidiaries are entities controlled by Novae Group. Control exists when NovaeGroup has the power, directly or indirectly, to govern the financial andoperating policies of an entity so as to obtain benefits from its activities. Inassessing control, potential voting rights that presently are exercisable orconvertible are taken into account. The financial statements of subsidiaries areincluded in the consolidated financial statements from the date that controlcommences until the date that control ceases. All subsidiaries are consolidated within the Group financial statements.Intragroup balances and any unrealised gains and losses or income and expensesarising from intragroup transactions are eliminated in preparing theconsolidated financial statements. (d) Classification and accounting for insurance contracts Insurance contracts are those contracts that transfer significant insurance riskat the inception of the contract. Insurance risk is transferred when an insureragrees to compensate a policyholder if a specified uncertain future eventadversely affects the policyholder. (i) Premiums Written premiums comprise the premiums on contracts entered into during theyear, irrespective of whether they relate in whole or in part to a lateraccounting period. Premiums are disclosed gross of commission payable tointermediaries and exclude taxes and levies based on premiums. Premiums writteninclude adjustments to premiums written in prior accounting periods andestimates for future premiums. An estimate is made at the balance sheet date torecognise retrospective adjustments to premiums or commissions. Outwardreinsurance premiums are accounted for in the same accounting period as thepremiums for the related inwards insurance or reinsurance business. (ii) Unearned premium provision The provision for unearned premiums comprises the proportion of gross premiumswritten which is estimated to be earned in the following or subsequent years,computed separately for each insurance contract in line with the risk exposureprofile. (iii) Claims Claims incurred consist of claims and claims handling expenses paid during thefinancial year together with the movement in the provision for outstandingclaims. Claims outstanding comprise provisions for the estimated cost of settling allclaims incurred but unpaid at the balance sheet date, whether reported or not,and related internal and external claims handling expenses. The ultimate liability as a result of outstanding claims will vary due tosubsequent information and events and may result in significant adjustments tothe amounts provided. Adjustments to the amounts of claims provisionsestablished in prior years are reflected in the financial statements for theperiod in which the adjustments are made, and disclosed separately if material. The main assumptions used in the calculation of the ultimate cost of outstandingclaims are detailed in note 25. (iv) Liability adequacy testing At each balance sheet date, liability adequacy tests are performed to ensure theadequacy of the insurance liabilities net of deferred acquisition costs. Inperforming these tests, current best estimates of future contractual cash flows,claims handling and administration expenses as well as investment income fromthe assets backing such liabilities are used. Any deficiency is immediatelycharged to the profit or loss initially by writing off deferred acquisitioncosts and by subsequently establishing a provision for losses arising fromliability adequacy tests ('unexpired risk provision'). (v) Reinsurance The Group cedes reinsurance in the normal course of business for the purpose oflimiting its net loss potential through the diversification of its risks.Premiums on reinsurance assumed are recognised as revenue on the same basis asdirect business, taking into account the product classification. Reinsurance assets include amounts recoverable from reinsurers for losses andloss adjustment expenses. If a reinsurance asset is impaired, the Group reducesits carrying amount accordingly, and will immediately recognise the impairmentloss in the income statement. A reinsurance asset will be deemed to be impairedif there is objective evidence, as a result of an event occurring after initialrecognition of the asset, that the Group may not receive all amounts due to itunder the terms of the contract, and that the event has a reliable measurableimpact on the amounts that the Group will receive from the reinsurer. Reinsurance arrangements do not relieve the Group from its direct obligations toits policyholders. (e) Segment reporting A segment is a distinguishable component of the Group that is either engaged inproviding a type of insurance (business segment), or in providing insurancewithin a particular economic environment (geographical segment), which issubject to risks and rewards that are different from those of other segments. (f) Revenue The basis on which premium revenue is recognised is set out in policy (d) above.Premium revenue comprises written premium less any amounts of unearned premium.Revenue also includes investment income; accounting policy (n) contains furtherdetails on its recognition. (g) Fees and commission income Fees and commission income comprise managing agent's fees receivable from thirdparty capital providers and commission receivable by the Group's servicecompanies. Commission income is accounted for at the time when the client ischarged, and a proportion is deferred to meet the future costs for the claimsassociated with the premiums that have been written. In addition, commission isaccrued to cover the underwriting costs that have been incurred prior toinception of the policy. (h) Expenses (i) Operating lease payments Payments made under operating leases are recognised in the income statement on astraight-line basis over the term of the lease. Lease incentives received arerecognised in the income statement as an integral part of the total leaseexpense. (ii) Financing costs Financing costs comprise interest payable on borrowings and off balance sheetletter of credit facilities provided by third parties calculated using theeffective interest rate method. (j) Income tax Income tax on the profit or loss for the year comprises current and deferredtax. Income tax is recognised in the income statement except to the extent thatit relates to items recognised directly in equity, in which case it isrecognised in equity. Current tax is the expected tax payable on the taxable income for the year andany adjustment to tax payable in respect of previous years. The Group calculatesincome tax using the current income tax rate. A deferred tax asset is recognised only to the extent that it is probable thatfuture taxable profits will be available against which the asset can beutilised. (k) Foreign currency Items included in the financial statements of each of the Group's entities aremeasured using sterling as this is the functional currency, being the primarycurrency of the economic environment in which the Group's entities operate.Transactions in foreign currencies are translated at the foreign exchange rateprevailing at that transaction date. Monetary assets and liabilities denominatedin foreign currencies at the balance sheet date are translated at the foreignexchange rate ruling at that date. Foreign exchange differences arising ontranslation are recognised in the income statement. Non-monetary assets andliabilities, primarily deferred acquisition costs and gross and ceded unearnedpremiums, are translated using the historical transaction rate. (l) Intangible assets Purchased syndicate capacity has been classed as a finite life asset. It isincluded at cost and amortised over the directors' estimate of its usefuleconomic life, currently fifteen years. Amortisation commences in the financialyear in which the underwriting results from the purchased capacity are firstrecognised. Provision is made for any impairment in the carrying amount ofpurchased capacity. (m) Property, plant and equipment (i) Owned assets Property, plant and equipment are stated at cost less accumulated depreciation(see below) and any impairment in value. Where categories of property, plant and equipment have different useful lives,they are accounted for as separate items. (ii) Depreciation Depreciation is charged in the income statement on a straight-line basis overthe estimated useful lives of each part of an item of property, plant andequipment. The estimated useful lives are as follows: Furniture and equipment 3 - 5 years Computer equipment 3 years Office refurbishment 3 - 5 years The residual value, if significant, is reassessed annually. (n) Financial assets Financial assets have been designated as fair value through profit and loss oninitial recognition. This has been deemed the most appropriate valuationmethodology for these assets as this reflects the fact that the investmentportfolios are managed, and their performance evaluated, on a fair value basis.Purchases and sales of financial assets are recognised on a trade date basis.Any gain or loss as a result of a change in fair value is recognised directlythrough the income statement. The fair value of financial instruments classified as fair value through profitor loss are held at their quoted bid price at the balance sheet date. Investmentincome and charges are recognised on an accruals basis based on the coupon rate. (o) Derivative financial instruments The Group uses derivative financial instruments to hedge its exposure to foreignexchange and interest rate risks arising from operational, financing andinvestment activities. In accordance with its treasury policy, the Group doesnot hold or issue derivative financial instruments for trading purposes. TheGroup monitors the effectiveness of its derivative financial instruments withregards to the requirements of IAS 39. (p) Deferred acquisition costs Acquisition costs comprise all direct costs arising from the conclusion ofinsurance contracts. Deferred acquisition costs represent the proportion ofacquisition costs incurred which corresponds to the unearned premiums provision.Acquisition costs are deferred only to the extent that available future marginsare expected to cover them. (q) Receivables Receivables are stated at amortised cost less impairment losses. (r) Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits. Includedwithin cash and cash equivalents are balances that are not freely available tothe Group, details of which are set out in note 24. These can be used to settlepolicyholder claims. (s) Impairment The carrying amounts of the Group's financial assets are reviewed at eachbalance sheet date to determine whether there is any indication of impairment.If any such indication exists, the carrying value is reduced to the estimatedrecoverable amount by means of a charge to the consolidated income statement. The recoverable amount of other assets is the greater of their netselling price and value in use. In assessing value in use, the estimated futurecash flows are discounted to their present value using a pre-tax discount ratethat reflects current market assessments of the time value of money and therisks specific to the asset. For an asset that does not generate largelyindependent cash inflows, the recoverable amount is determined for thecash-generating unit to which the asset belongs. (t) Convertible debt The fair value of the liability portion of the convertible bond is determined bydiscounting contractual cash outflows using the interest rate payable on anequivalent non-convertible bond. The amount is carried as a liability on aneffective interest basis until extinguished on conversion or redemption. Theremainder of the issue proceeds is allocated to the conversion option and isrecognised and included in shareholders' equity on initial recognition.Transaction costs are amortised on an effective interest rate basis over theduration of the bond. These costs have been allocated between the debt andequity component of the convertible bond in a way deemed most appropriate by theGroup. (u) Interest-bearing loans and borrowings Interest-bearing loans and borrowings are recognised initially at fair valueless attributable issue costs, and thereafter at amortised cost. Attributableissue costs are amortised on an effective interest rate basis over the term ofthe borrowings. Borrowing costs are expensed rather than capitalised. (v) Dividends Dividends are recognised in the period in which they are paid and received. (w) Employee benefits (i) Defined contribution plans Obligations for contributions to defined contribution pension plans arerecognised as an expense in the income statement as incurred. (ii) Share-based payment transactions The Group's equity incentive schemes allow its employees to acquire shares ofNovae Group plc. The fair value of options and long term incentive plan sharesgranted are recognised as an expense with a corresponding increase in equity.The fair value is measured at grant date and spread over the period during whichthe employees become unconditionally entitled to the options. The fair value ofthe options granted is measured using a binomial lattice model, theBlack-Scholes formula and a Monte Carlo simulation, taking into account theterms and conditions upon which the options were granted. The amount recognisedas an expense is adjusted to reflect the actual number of share options thatvest except where forfeiture is due only to changes in market conditions or asthe scheme progresses, for example share prices not achieving the threshold forvesting. IFRS 2 has not been applied to arrangements prior to 7 November 2002,and those granted subsequently that had vested by 1 January 2005. (x) Payables Payables are measured at fair value on initial recognition and subsequently arestated at amortised cost. 2. Management of financial and insurance risk Financial risk Exposure to market (including foreign currency), credit and liquidity risksarise in the normal course of the Group's business. Further details on these areprovided in the Operating and Financial Review, which also details operational,group, regulatory and reputational risks. Market risk The Group's exposure to market risk for changes in interest rates isconcentrated in Novae's investment portfolio, and to a lesser extent, theGroup's debt obligations. Insurance reserves and other liabilities deriving from business transacted onforeign currencies exposes the Group to foreign exchange risk. Premium incomecash flows from the underwriting of business originating outside of the UK arethe primary source of funds for the purchase of investments denominated inforeign currencies. These investments are purchased primarily to match insurancereserves and other liabilities denominated in the same currency, acting as aneconomic hedge to reduce Novae's exposure to exchange rate fluctuations. Ananalysis of investments by currency is provided in note 21. Credit risk The Group's portfolios of fixed income securities are subject to credit risk.The risk is defined as the potential loss in market value resulting from adversechanges in the borrower's ability to repay the debt. The Group monitors itsexposure to such credit risk by comparing the value and credit rating of itsinvestments against a benchmark determined by the Investment Committee and thisis reported to the Board monthly. The credit worthiness of the Group's financialassets are detailed in note 21. The Group underwrites insurance risk and reinsures a substantial portion of thatrisk with third party reinsurers. There is a degree of credit risk associatedwith reinsuring to third parties and in order to manage this risk credit reviewsof the underlying financial stability of the reinsurance entity are performed.This is performed by the Reinsurance Security Vetting Committee. The reinsurers'share of paid and notified losses is analysed by credit rating in note 22. The Group also has other receivable amounts subject to credit risk. The mostsignificant of these are amounts due from brokers. To mitigate risk of thesecounterparties' non-payment of amounts due, business and financial standards forbroker approval are established. The Group's exposure to individual brokers ismonitored on a monthly basis by the Broker Vetting Committee. Liquidity risk This exists to the extent that the Group must be able to satisfy claims, meetsolvency and funding requirements, and meet working capital needs. This isfurther outlined in the Operating and Financial Review. Insurance risk Reserving risk and the uncertainty in establishing claims reserves aremeasurement risks and are discussed further as part of the disclosure on claims(see note 25). Underwriting risk is an insurance risk that arises on the Group'sunderwriting activities within each of the business segments Specialty,Property, Liability and Aviation & Marine. These are discussed further in note5. Underwriting risk is managed by monitoring risk tolerance levels, referred tointernally as Willingness to Lose ("WTL"). This is set by the Boards of theLloyd's managing agency and NICL in consultation with the Board of Novae Groupplc. WTL is defined as being the maximum loss net of reinsurance andreinstatement premiums the Group is prepared to absorb from any one definedcatastrophic event, being the main concentrations of insurance risks facing theGroup. For example, the defined event for Florida windstorm is assumed to be ageneric scenario with an overall insured loss of $60.0 billion. Key instances of the Group's WTL as at 31 December 2006 are discussed within thesegmental review section of the Operating and Financial Review. 3. Earnings per share Basic earnings per share The calculation of earnings per share of 3.8 pence (2005: loss of 4.8 pence) isbased on a profit attributable to equity shareholders of the parent company of£21.5 million (2005: loss of £17.2 million) and on 562.9 million shares (2005:361.2 million shares), being the weighted average number of shares in issue,excluding shares held by the Employee Benefit Trust and earmarked for theGroup's Long Term Incentive Plan, during the year ended 31 December 2006. Diluted earnings per share Diluted earnings per share are calculated adjusting the weighted average numberof shares outstanding to assume conversion of all potentially dilutive shares.Novae Group has two categories of potentially dilutive ordinary shares:convertible debt and share options. The convertible debt is assumed to have beenconverted into shares and the net profit adjusted to eliminate the interesteffect less the tax effect. For share options, a calculation is made todetermine the number of shares that could have been acquired at fair value(determined as the average annual market share price) based on the monetaryvalue of the subscription rights attached to outstanding share options. Thenumber of shares calculated as above is compared to the number of shares thatwould have been issued assuming the exercise of the share options. For the years ended 31 December 2006 and 2005, the convertible debt and shareoptions are not considered to have any dilutive effect as the average marketprice of ordinary shares during these years did not exceed the exercise price. Year ended Year ended 31 December 31December 2006 2005 £m £mProfit/(loss) for the year attributable to equity 21.5 (17.2)shareholders of parentInterest expense on convertible debt (net of tax) - -Profit used to determine diluted earnings per share 21.5 (17.2)Weighted average number of shares in issue (millions) 562.9 361.2Adjustments for: - assumed conversion of convertible debt (millions) - -- share options (millions) - -Weighted average number of shares for diluted earnings 562.9 361.2per shareDiluted earnings per share (pence per share) 3.8 (4.8) 4. Principal exchange rates (to sterling) Year ended Year ended 31 December 2006 31 December 2005 Year Year Year Year average End average endUS dollar 1.84 1.95 1.82 1.72Euro 1.47 1.48 1.46 1.46Canadian dollar 2.09 2.28 2.21 2.01 5. Segmental information Segmental information is presented in respect of the Group's business andgeographic segments. The primary format, business segments, is based on theGroup's management and internal reporting structure. An analysis of the technical profit of the Group is presented below. Thisanalyses the underwriting return split by business segment, separating out theactivities of the ongoing business from the reserve deterioration on thediscontinued units. It is included to increase clarity over the performance ofthe ongoing units, but does not represent a discontinued business analysis forIFRS 5 purposes. Segment results, assets and liabilities include items that can be allocated on areasonable basis. Unallocated items comprise insurance working capital andcentral group items. The Group comprises the following main business segments in addition to theDiscontinued Units: (i) Specialty Business included within the Specialty segment relates to financialinstitutions, professional indemnity, management liability, political & creditrisks, specie & cargo and special situations. (ii) Property The Property segment consists of both direct and reinsurance business transactedin the US and internationally (including the UK). (iii) Liability The general liability book comprises UK general and employers' liability riskssupplemented by Australian binder business and a marine liability account. (iv) Aviation & Marine This segment is dominated by aviation reinsurance but also includes a specialisthull account, marine war and an energy account, the latter being a newdevelopment in 2006. 5a. Segmental information including 100% level syndicate analysis This information is presented to include 100% of the syndicate results. This isto avoid any distortion from the effects of change in ownership of syndicatesbetween underwriting years. All stated operating ratios are calculated byreference to the following information: The segmental results for the year ended 31 December 2006 are as follows: Specialty Property Liability Aviation Discontinued Total Marine units £m £m £m £m £m £mGross written 158.6 52.1 48.7 47.5 (4.7) 302.2premiumNet written premium 129.9 17.2 39.8 36.5 (5.7) 217.7Net premium revenue 129.5 35.7 45.2 31.4 (5.7) 236.1Net claims incurred 60.2 11.8 25.8 16.5 10.3 124.6Operating expenses 39.9 15.4 15.7 9.7 0.1 80.8 (includingbrokerage) The segment results for the year ended 31 December 2005 are as follows: Specialty Property Liability Aviation & Discontinue Total Marine units £m £m £m £m £m £mGross written 111.5 71.0 40.7 25.8 (1.3) 247.7premiumNet written premium 68.4 54.6 29.8 18.8 (4.5) 167.1Net premium revenue 109.1 95.3 61.0 22.9 (4.5) 283.8Net claims incurred 75.1 98.3 30.8 1.9 43.5 249.6Operating expenses 18.7 26.0 17.4 6.3 2.6 71.0 (includingbrokerage) 5b. Segmental Novae ownership level analysis The segmental results for the year ended 31 December 2006 are as follows: Specialty Property Liability Aviation Dis Group Total & Marine continued units £m £m £m £m £m £m £m Net premium 113.2 35.8 45.2 31.4 (4.8) - 220.8revenueNet claims (54.1) (12.2) (25.7) (16.5) 5.0 1.3 (102.2)incurredInvestment 11.6 5.3 4.0 1.7 0.8 9.5 32.9returnOther income - - - - - 9.7 9.7Acquisition (21.9) (12.5) (11.5) (5.0) 0.3 - (50.6)costsOperating (13.6) (4.8) (4.7) (3.6) (0.4) (36.7) (63.8)expenses*Operating profit 35.2 11.6 7.3 8.0 0.9 (16.2) 46.8/ (loss)Financing costs (14.0)Cost of scheme (1.5)of arrangementProfit/(loss) 31.3before tax * includes the currency loss on non-monetary items of £6.5 million (2005: gainof £3.0 million). The segment results for the year ended 31 December 2005 are as follows: Specialty Property Liability Aviation Dis Group Total & Marine continued units £m £m £m £m £m £m £m Net premium 93.6 96.0 61.1 22.9 (4.0) 1.0 270.6revenueNet claims (63.9) (97.3) (30.9) (1.9) 6.3 - (187.7)incurredInvestment 6.1 4.3 2.8 0.8 (0.2) 12.0 25.8returnOther income - - - - - 7.3 7.3Acquisition (20.1) (15.4) (14.4) (3.2) (0.1) - (53.2)costsOperating (9.3) (17.5) (6.9) (3.9) (2.2) (20.1) (59.9)expensesOperating profit 6.4 (29.9) 11.7 14.7 (0.2) 0.2 2.9/ (loss)Profit on sale 4.0of subsidiaryFinancing costs (20.8)Profit/(loss) (13.9)before tax 5c. Segmental balance sheet analysis Relevant balance sheet captions are deemed to be attributable to the businesssegments as follows:As at Aviation Total Discontinued31 December & Marine (ongoing) units2006 Specialty Property Liability Total £m £m £m £m £m £m £mGrossprovision forclaims 519.0 77.2 133.7 74.7 804.6 222.8 1,027.4outstandingLiabilitiesunallocatedby segment 262.7Shareholders'funds 239.8 Total 1,529.9liabilities Reinsurers'share ofclaims 276.2 27.9 11.2 33.5 348.8 59.6 408.4outstandingInvestment 199.1 26.4 49.9 10.7 286.1 74.6 360.7assetsattributable 475.3 54.3 61.1 44.2 634.9 134.2 769.1Assetsunallocatedby segment 760.8 Total assets 1,529.9 As at Aviation Total Discontinued31 December & Marine (ongoing) units2005 Specialty Property Liability Total £m £m £m £m £m £m £mGrossprovision forclaims 580.8 164.9 133.4 73.5 952.6 325.6 1,278.2outstandingLiabilitiesunallocatedby segment 307.1Shareholders'funds 112.4 Total 1,697.7liabilities Reinsurers'share ofclaims 338.2 72.0 16.9 41.0 468.1 93.4 561.5outstandingInvestment 193.3 37.7 6.2 2.0 239.2 100.7 339.9assetsattributable 531.5 109.7 23.1 43.0 707.3 194.1 901.4Assetsunallocatedby segment 796.3 Total assets 1,697.7 5d. Gross premium revenue by market The following table shows the distribution of the Group's consolidated grosswritten premium by geographical market (including 100% of the syndicateresults): Year ended Year ended 31 December 31 December 2006 2005 £m £m United Kingdom 125.6 111.5 North America 92.1 74.1 Elsewhere 84.5 62.1 302.2 247.7 The assets and liabilities of the Group are not managed on a geographical basisand subsequently no geographical split has been provided. 6. Net premium revenue Year ended Year ended 31 December 31 December 2006 2005 £m £mGross written premiums 281.2 244.3Change in the gross provision for unearned premiums 22.7 122.3Gross premium revenue 303.9 366.6Outward reinsurance premiums (78.6) (74.5)Change in reinsurers' share of provision for unearned (4.5) (21.5)premiumsPremium ceded to reinsurers (83.1) (96.0)Net premium revenue 220.8 270.6 7. Fees and commission income Year ended Year ended 31 December 31 December 2006 2005 £m £m Managing agency fees 0.9 1.1 Other income 8.8 6.2 9.7 7.3 8. Investment income Year ended Year ended 31 December 31 December 2006 2005 £m £m Interest income 30.7 29.1 Net fair value gains / (losses) 2.9 (2.6) Investment management expenses (0.7) (0.7) 32.9 25.8 9. Net claims incurred Year ended Year ended 31 December 31 December 2006 2005 £m £m Claims paid (307.2) (321.8) Decrease / (increase) in gross claims provision 148.6 (68.2) Utilisation of exceptional loss provision 14.3 40.0 Gross claims incurred (144.3) (350.0) Reinsurers' share of claims paid 152.3 137.4 (Decrease) / increase in reinsurers' share of claims (110.2) 24.9 provision Reinsurers' share of claims incurred 42.1 162.3 Net claims incurred (102.2) (187.7) 10. Policy acquisition costs Year ended Year ended 31 December 31 December 2006 2005 £m £m Brokerage and other business acquisition costs 49.1 28.2 Increase in deferred brokerage and other business 1.5 25.0 acquisition costs 50.6 53.2 11. Other operating expenses Year ended Year ended 31 December 31 December 2006 2005 £m £m Underwriting expenses 27.3 40.8 Distribution company expenses 5.4 9.0 Central group expenses 24.6 13.1 57.3 62.9 Operating expenses include auditors' remuneration as follows: Fees payable to the auditor of the Company for the audit of the Company's annual accounts 0.2 0.2 Fees payable to the Company's auditor for other services: - The audit of the Company's subsidiaries pursuant 0.3 0.2 to legislation - Tax services 0.1 0.1 Further assurance services: - Actuarial review 0.2 0.2 Other services pursuant to legislation 0.1 0.1 0.9 0.8 Audit fees of £0.2 million (2005: £0.2 million) for syndicates and £0.1 million(2005: £nil) for Novae Insurance Company Limited are included within the "auditof the Company's subsidiaries pursuant to legislation" line in the table above. In addition, fees of £0.2 million were incurred in relation to the workingcapital review and other work undertaken as part of the scheme of arrangement. All of these amounts are payable to KPMG Audit Plc except £12,000 (2005:£12,000) which is payable to CLB Littlejohn Frazer. 12. Disposal of subsidiary On 4 November 2005 the Group disposed of its investment in Fusion InsuranceServices Limited ("Fusion"). Profit on disposal was £4.0 million, arising fromproceeds of £15.0 million net of transaction costs of £1.5 million less theGroup's share of Fusion's net assets of £9.5million. The carrying value of the assets and liabilities disposed of at 4 November 2005were as follows: £m Cash and cash equivalents 14.2 Accounts receivable 13.5 Property, plant and equipment 0.8 Trade payables (16.6) Carrying value at disposal 11.9 Less: minority interest (2.4) Non cash transaction cost 1.2 Profit on disposal 4.0 Proceeds from disposal, net of cash transaction costs 14.7 Less: cash and cash equivalents disposed of (14.2) Cash flow on disposal, net of cash and cash 0.5 equivalents disposed of 13. Financing costs Year ended Year ended 31 31 December December 2005 2006 £m £mCost of convertible bond 4.0 4.6Loan note interest 2.0 2.0Reinsurer letter of credit costs 7.5 13.8Bank letter of credit cost and other fees 0.5 0.4 14.0 20.8 14. Income taxes Recognised in income statement Year ended Year ended 31 December 31 December 2006 2005 £m £mCurrent tax expense: Current year - 0.3Adjustments for prior years - - - 0.3Deferred tax (see note 19): Effect of tax losses (recognised) / de-recognised (9.8) 2.9Total income tax (benefit) / expense in income (9.8) 3.2statement Reconciliation of effective tax rateProfit / (loss) before tax 31.2 (13.9)Income tax at the standard UK corporation tax rate 9.4 (4.2)(30%)Effect of disallowable expenditure 0.4 -Tax losses utilised (9.8) -Effect of tax losses not recognised - 7.4 - 3.2 The future tax charge for the Group is dependent on the ability of the Group toutilise Group tax losses. 15. Employees (a) Employee numbers The average number of persons employed during the period (including directors),analysed by category, was as follows: Year ended Year ended 31 December 31 December 2006 2005 Underwriting 91 86Claims and reinsurance 41 36Finance and actuarial 33 27Operations 32 33Internal audit, secretariat 6 6and compliance 203 188Fusion - 114 203 302 As discussed in note 12, Fusion was disposed of on 4 November 2005. With effectfrom that date all employees of Fusion ceased to be employed by the Group. (b) Employee costs Year ended Year ended 31 December 31 December 2006 2005 £m £m Wages and salaries 13.2 17.8Performance related pay 10.2 3.8Contributions to defined contribution pension 1.9 2.4plansSocial security costs 2.9 2.6Employee equity incentives 3.2 1.6Compensation for loss of office 0.2 -Other related costs 0.3 0.2 31.9 28.4 (c) Share based payments The terms and conditions of the grants, and number of outstanding optionsgranted to directors and employees of the Group, are as follows, whereby alloptions are settled by physical delivery of shares: Grant date Outstanding Vesting conditions Contractual instruments life of obligationsShare options24/07/98 262,131 Three years' service 10 years04/11/99 189,969 Three years' service. At date of 10 years exercise, increase in net asset value of Group over preceding three year period to be 6% higher than increase in FTSE 350 Index 06/10/00 550,381 Three years' service 10 years11/11/02 2,137,208 Three years service. 50% vest if 10 years share price is 150% of price at date of grant. Performance target rises to 175% and 200% for two subsequent 25% tranches18/11/03 750,000 Three years' service. 50% vest if 10 years share price 10 years exceeds 150% of option price, a further 25% vest at 175% and the remaining 25% at 200%18/11/03 1,335,000 Three years' service. 50% vest if 10 years share price is 125% of option price with the remaining 50% at 150%05/05/04 5,524,700 Three years' service. Net tangible 10 years assets (NTA) must exceed 55.8p + RPI + 9% pa at 31/12/06 or NTA must exceed 55.8p + RPI + 12% pa at 31/12/ 0705/05/04 100,000 Three years' service. 50% vest if 10 years share price is 125% of option price with the remaining 50% at 150% LTIP shares11/11/02 1,977,180 Three years' service. 1,422,808 vest 3 years, if share price is 150% x prevailing extended by a share price. 267,186 vest if share further 2 price is 175 % x prevailing share years from 11 price and 267,186 vest if share price /11/05 is 200% x prevailing share price05/05/04 150,000 Three years' service. Positive NTA 3 years17/12/04 1,075,056 Three years' service. Positive NTA 3 years05/01/05 9,800,000 Three years' service. 25% vest if NTA 3 years increases by RPI + 5%, a further 25% at NTA + RPI + 10% and the remaining 25% at NTA + RPI + 15% (these conditions have yet to be recalibrated to allow for the effects of the rights issue)16/01/06 16,075,810 Three years' service. Award in two 3 years parts: Part A (75% of total): adjusted NTA increases from 28.9p to 34.9p in 25% increments (ie 50% vests if NTA increases to 31.9p), where adjusted NTA equals actual NTA less changes in NTA attributable to 2002 and prior Years of Account. Part B (25% of total): NTA increases from 28.9p to 34.9p in 25% increments (ie 50% vests if NTA increases to 31.9p) The options are exercisable between three and ten years after grant subject tothe satisfaction of the relevant performance targets. The expiry date of allshare options is ten years following the issue date. The expiry date of all LTIPawards is three years following the issue date. On 18 November 2006, 1,612,500 LTIP shares vested. Prior to merger with the Group, CLM Insurance Fund plc (CLM) had granted optionsto certain employees under the CLM Insurance Fund plc Senior Executive ShareOption Scheme 1994. These were converted into options in Novae on equivalentterms. On 16 January 2006, 3,550,325 deferred shares were granted. The number and weighted average exercise price of share options isas follows: Weighted Number of Weighted Number of average options average options exercise 2006 exercise 2005 price thousands price thousands 2006 2005 pence pence Outstanding at the beginning of 57 11,233 57 11,248 the year Forfeited during the year 53 (334) 51 (15) Exercised during the year - - - - Granted during the year - - - - Outstanding at the end of the 57 10,899 57 11,233 year Exercisable at the end of the 57 10,899 57 11,233 year The options outstanding at 31 December 2006 have an exercise price in the rangeof 46.8p to 162.8p and a weighted average contractual life of six years. The fair value of services received in return for share options granted aremeasured by reference to the fair value of share options granted. The estimateof the fair value of the services received is measured based on a binomiallattice model. The contractual life of the option (10 years) is used as an inputinto this model. Expectations of early exercise are incorporated into thebinomial lattice model. Share options Fair Issue Exercise Expected Option Expected Riskfree value price price volatility life dividends interest rateShare options 18/11/03(a) 15.0p 49.0p 57.0p 50% pa 10 years nil 5 % pa18/11/03(b) 18.4p 49.0p 49.0p 50% pa 10 years nil 5 % pa05/05/04(a) 15.14p 50.83p 50.83p 35% pa 10 years nil 5 % pa05/05/04(b) 14.4p 50.83p 50.83p 35% pa 10 years nil 5 % paLTIP shares 05/05/04 51.0p 51.0p n/a n/a n/a nil n/a17/12/04 32.5p 32.5p n/a n/a n/a nil n/a05/01/05 32.5p 32.5p n/a n/a n/a nil n/a16/01/06 30.0p 30.0p n/a n/a n/a nil n/a The expected volatility is based on historic volatility. The actual volatilityover the period 2002-2003 was higher than has been the case in more recentperiods, which is reflected in the differential volatility assumptions onearlier and later incepting options. Vesting of options is conditional upon a service condition and a marketcondition in all cases except tranche (a) of the 05/05/04 grant which has aservice condition and a non-market condition. The fair value of this tranche hasbeen determined using the Black-Scholes formula, and the other tranches using aMonte Carlo simulation. Option life is in all cases 10 years from date of grant, with the option toexercise from three years subject to vesting conditions being met. Indetermining the fair value, it has been assumed that 50% of options will beexercised after three years, and 10% in each of the subsequent five years. The historical price of Novae (previously SVB) shares has shown considerablevolatility in recent years, which reflects the position of the Group during theperiod in which losses emerged from the US liability business written in thelate 1990s. It appears inappropriate to assume a similar level of volatility inthe future, and a lower value has been assumed for the purposes of valuing theoptions. The 05/05/04 and 17/12/04 LTIP awards have the same vesting condition, i.e.positive NTA at expiry. The fair value of these at grant has been taken as thethen prevailing share price. The 05/01/05 grant vests in tranches based uponprogressively more onerous NTA targets. In determining the fair value it hasbeen assumed that the first 50% will vest, which is to say that NTA increases byRPI plus between 10% and 15% pa over the three years. The 16/01/06 grant also vests based upon progressive NTA targets, although theseare less onerous than the 05/01/05 grant. Applying consistent assumptions to thetwo awards produces a fair value equal to the then prevailing share price of30.0p. 16. Property, plant and equipment Group Computer Fixtures, Office Total equipment fittings, refurbishment £m £m tools & £m equipment £mCost As at 1 January 2005 9.8 0.3 3.0 13.1Additions 1.0 0.3 0.1 1.4Disposals (8.3) (0.2) (2.4) (10.9)As at 31 December 2005 2.5 0.4 0.7 3.6Balance as at 1 January 2006 2.5 0.4 0.7 3.6Additions 1.2 - - 1.2Disposals - - - -As at 31 December 2006 3.7 0.4 0.7 4.8Depreciation 7.0 0.2 2.5 9.7 As at 1 January 2005Charge for the period 1.9 0.2 0.3 2.4Disposals (7.7) (0.3) (2.3) (10.3)As at 31 December 2005 1.2 0.1 0.5 1.8Balance as at 1 January 2006 1.2 0.1 0.5 1.8Charge for the period 1.3 0.2 0.2 1.7Disposals - - - -As at 31 December 2006 2.5 0.3 0.7 3.5Net book value As at 31 December 2005 1.3 0.3 0.2 1.8As at 31 December 2006 1.2 0.1 - 1.3 17. Intangible assets Syndicate capacity 31 December 31 December 2006 2005 £m £m CostAs at beginning of period 14.6 14.6Additions 0.1 -As at end of period 14.7 14.6AmortisationAs at beginning of period 6.3 5.3Charge for the period 1.0 1.0As at end of period 7.3 6.3Net book valueOpening 8.3 9.3Closing 7.4 8.3 The amortisation charge is included within operating expenses. The remainingamortisation period is seven years for the majority of the asset. 18. Deferred acquisition costs 31 December 31 December 2006 2005 £m £m Balance at start of the year 25.3 46.9 Utilisation of balance brought forward (22.3) (39.5) Additional amounts deferred in year 21.7 17.9 Balance at end of the year 24.7 25.3 19. Deferred tax Recognised deferred tax assets The deferred tax asset is attributable to the following: 31 December 31 December 2006 2005 £m £m Temporary differences (0.8) (0.8)Unutilised tax losses 32.4 42.2 31.6 41.4 Unrecognised deferred tax assets Deferred tax assets have not been recognised in respect of the following items: 31 December 31 2006 December 2005 £m £m Trading losses (30% of gross unrecognised losses) 24.1 17.9 Deferred tax assets have not been recognised in respect of losses amounting to£24.1 million due to the uncertainty that future taxable profit will beavailable against which the Group can utilise the benefits therefrom. Futureutilisation of the asset has been measured by reference to the Group's projectedprofit. The Group also has accumulated gross capital losses of £45.8 million. No assethas been recognised in respect of these losses. 20. Principal subsidiary undertakings Country of Class of Principal Percentage incorporation share held activity of ordinary shares heldNovae Holdings PLC England & Ordinary Intermediate 100% Wales holding companyNovae Syndicates Limited England & Ordinary Lloyd's 100% Wales managing agencyNovae Corporate Underwriting England & Ordinary Lloyd's 100%Limited Wales corporate memberNovae Management Limited England & Ordinary Infrastructure 100% Wales companyNovae Insurance Company England & Ordinary Insurance 100%Limited Wales companyNovae Underwriting Limited England & Ordinary Service company 100% WalesNovae Capital 1 Limited England & Ordinary Not trading 100% WalesCredit Indemnity & Financial England & Ordinary Not trading 100%Services Limited WalesNovae Group SIP Trustee England & Ordinary Not trading 100%Company Limited WalesSyndicate Capital England & Ordinary Not trading 100%Underwriting Limited Wales The results, assets and liabilities of all of the above subsidiaries areincluded in the consolidated financial statements. 21. Financial assets 31 31 December December 2006 2005 Fair value through profit or loss: £m £m Fixed interest securities 586.2 578.5 Equities 0.8 0.8 587.0 579.3 Syndicate 262.5 339.9 Corporate 324.5 239.4 587.0 579.3 Listed 587.0 579.3 Unlisted - - 587.0 579.3 Breakdown of fixed interest securities by credit 31 December 31rating: 2006 December 2005 % %Government/AAA 88.7 94.0AA+/AA/AA- 10.2 3.0A+/A/A- 1.1 3.0 100.0 100.0 Breakdown of investments by currency: 31 December 31 2006 December 2005 % %US dollar 45.4 46.4Sterling 43.5 47.1Other currencies 11.1 6.5 100.0 100.0 The maturity profile of investments based on the average duration is as follows: 31 Average December duration 2006 £m Years Funds at Lloyd's 226.3 0.4 Syndicate Premium Trust Funds 262.5 0.7 Novae Insurance Company Limited 98.2 0.9 The funds at Lloyd' are subject to a charge as detailed in note 30. 22. Reinsurance contracts 31 December 31 December 2006 2005 £m £mReinsurance contracts 423.3 587.2Less:Reinsurers' share of:- provisions for unearned premium (21.2) (25.7)- claims outstanding 402.1 561.5- provision for losses incurred but not reported (90.7) (108.0)Balance 311.4 453.5 Being:Recoveries on claims notified not yet due 316.9 465.2Provision for bad debt (notified not yet due) (5.5) (11.7) Net recoveries on claims notified not yet due 311.4 453.5 The reinsurers' share of paid and notified losses can be analysed by creditrating as follows*: 31 31 December December 2005 2006 % %S&P: AAA 19.3 13.1 AMB: A++S&P: AA 62.1 32.7 AMB: A/A-S&P: A (inc Lloyd's) 14.8 44.6 AMB: B++/B+Less than A 3.8 9.6 100.0 100.0 * Due to the way the Group monitors its reinsurance balances, different ratingagencies are used depending upon the domicile of the reinsurer. Standard & Poors(S&P) and AM Best (AMB) ratings have been grouped together in a way that theGroup has deemed most appropriate. 23. Insurance and other receivables 31 December 31 December 2006 2005 £m £m Arising from underwriting business 201.9 196.1 Arising from service companies and other subsidiaries 8.6 28.8 Prepayments and accrued income 3.2 9.5 213.7 234.4 Receivables are stated at fair value. 24. Cash and cash equivalents 31 December 31 December 2006 2005 £m £m Cash 162.8 139.2 Overseas deposits 78.1 80.8 240.9 220.0 Of the total cash and cash equivalents £199.8 million (2005: £188.5 million) isheld by the syndicates in Premium Trust Funds to meet policyholder liabilities. 25. Insurance contracts (a) Insurance contract liabilities 31 December 31 December 2006 2005 Gross Net Gross Net Reinsurance Reinsurance £m £m £m £m £m £mUnearned premiums 136.1 21.2 114.9 155.8 25.7 130.1IBNR 308.6 90.7 217.9 357.9 105.0 252.9Notified claims 718.8 311.4 407.4 920.3 456.5 463.8Exceptional loss 12.8 - 12.8 27.1 - 27.1 provisionTotal insurance 1,176.3 423.3 753.0 1,461.1 587.2 873.9 liabilitiesContracts due 286.7 115.9 170.8 407.3 182.8 224.5 < 1 yearContracts due 889.6 307.4 582.2 1,053.8 404.4 649.4 > 1 year 1,176.3 423.3 753.0 1,461.1 587.2 873.9 In addition to IBNR reserves established at subsidiary level on the basis ofactuarial best estimate totalling £196.7 million (2005: £232.2 million), anadditional £12.8 million of provision has been recognised as at 31 December 2006(2005: £27.1 million) in respect of the uncertainty surrounding potential futureclaims development from discontinued units. This provision, which is over andabove syndicate reserves set at actuarial best estimate, was established as at30 June 2004 to meet possible future adverse claims development. During the yearended 31 December 2006 £14.3 million of this provision was utilised, leaving£12.8 million remaining at year end. The provision was established to strengthen reserves associated with thediscontinued business, in particular the liability reinsurance business, whichare subject to a high degree of uncertainty. This reflects market conditions inthe late 1990s and the claims environment in the US in the period covered by thecontracts written being significantly different from that in prior periods,which makes any projection methodology that relies upon extrapolation of pasttrends subject to an increased degree of subjectivity. For similar reasons Syndicates 1007 and 1241 have not closed their2002 Years of Account. The 2006 annual reports for both state that theuncertainty that led to the accounts going into run off at 36 months stillprevails at 60 months. This uncertainty arose due to deterioration in treatyreserves and late advices from assureds, which have produced some exhaustion ofthe excess of loss reinsurance programmes both on an incurred and on an incurredbut not reported basis. As a result of these matters, there exists significant uncertainty concerningthe amounts provided and subsequent information and events may result insignificant adjustments to the amounts provided. (b) Movement table for insurance contract liabilities Year ended Year ended (i) Unearned premium 31 December 31 December 2006 2005 £m £mBalance as at 1 January 155.8 279.0 Premiums written during the year 250.5 243.4 Less: premiums earned during the year (270.2) (366.6) Balance at 31 December 136.1 155.8 (ii) Claims reserve Year ended Year ended 31 December 31 December 2006 2005 £m £m Balance as at 1 January 1,278.2 1,125.5(Reduction)/increase in claims outstanding (199.6) 198.9Reduction in IBNR (49.3) (47.4)(Reduction)/increase in claims handling provision (1.9) 1.2Balance at 31 December 1,027.4 1,278.2 (iii) Exceptional loss provision Year ended Year ended 31 December 31 December 2006 2005 £m £m Balance as at 1 January 27.1 67.1Utilised during year (14.3) (40.0)Balance at 31 December 12.8 27.1 (c) Claims development Claims development is shown below on an underwriting year basis. 2001 and prior 2002 2003 2004 2005 2006 TotalUnderwriting year £m £m £m £m £m £m £mGross claims: Estimate of ultimate grossclaims: 2,011.9 241.0 198.6 247.1 260.9 160.4- at end of underwritingyear- one year later 2,110.2 230.9 202.3 236.1 238.5- two years later 2,321.8 226.2 179.0 234.5- three years later 2,503.9 260.2 164.0- four years later 2,642.4 267.1- five years later 2,638.5Gross claims paid - at end of underwriting 840.2 4.3 3.9 10.4 22.0 3.1year- one year later 1,119.8 27.4 34.8 59.0 86.1- two years later 1,403.4 67.7 61.5 113.5- three years later 1,636.8 116.6 79.9- four years later 1,837.7 142.3- five years later 1,992.4Gross ultimate claims 646.1 124.8 84.1 121.0 152.4 157.3 1,285.7reserveGross unearned claims (95.6)reserveThird party participation (162.7)on syndicatesGross claims reserve 1,027.4 2001 and prior 2002 2003 2004 2005 2006 TotalUnderwriting year £m £m £m £m £m £m £mNet claims: Estimate of ultimate netclaims 1,187.4 158.5 138.6 189.8 178.5 125.6- at end of underwritingyear- one year later 1,231.4 156.1 140.7 180.7 157.1- two years later 1,262.9 140.0 121.6 166.8- three years later 1,414.9 157.0 116.4- four years later 1,463.5 159.2- five years later 1,470.6Net claims paid - at end of underwriting 544.9 4.1 3.9 10.3 8.9 3.1year- one year later 708.4 21.8 21.1 47.2 40.6- two years later 848.8 48.6 40.6 77.8- three years later 983.1 76.3 55.3- four years later 1,087.0 90.9- five years later 1,148.4Net ultimate claimsreserve 322.2 68.3 61.1 89.0 116.5 122.5 779.6Net unearned claims reserve (78.9)Third party participation (75.4)on syndicatesNet claims reserve 625.3 The tables above show the development of claims over time on a gross and net ofreinsurance basis. These claims are shown on an ultimate basis for eachsuccessive underwriting year and include 100% of the syndicate level results.Balances have been translated at exchange rates prevailing at 31 December 2006in all cases. The information shown above is prepared on an underwriting year basis and thentherefore it relates the expected cost of claims to the level of ultimatepremiums. Changes in the projected level of ultimate premiums will thereforecontribute to the movement in claims costs shown above. Across all prior yearsnet of reinsurance and excluding the business of the discontinued units coveredby a separate provision (see note 25(a)), that component of claims developmentthat relates to settlement of claims at levels different from reserves carriedor reassessment of reserves required in respect of claims that remain unsettledamounted in aggregate to a credit of £3.9 million in respect of the Novaecorporate member. It is this amount which constitutes the movement in reservesnet of reinsurance on an accident year basis attributable to Novae. (d) Assumptions and sensitivities (i) Assumptions The ultimate cost of outstanding claims is in most cases estimated by using arange of standard actuarial projection techniques, such as the Chain Ladder andBornhuetter-Ferguson methods. Such methods extrapolate the development of claimsnumbers for each underwriting year, based on the claims patterns of earlieryears and expected loss ratios. Exceptions to these standard methodologies areused in a small number of cases where these are inappropriate. The main assumption underlying these standard techniques is that past claimsdevelopment experience can be used to project ultimate claims costs. Judgementis used to assess the extent to which past trends may not apply in future andalternative approaches are applied as appropriate for catastrophe exposed claimswhere loss development patterns are less regular. The approach adopted takes into account, inter alia, the nature and materialityof business and the type of data available. Specific estimates are set by theReserving Committee based on a blend of these techniques, applying theirexperience and knowledge to the circumstances of individual claims, and in thecase of certain US liability classes, the advice of US attorneys who specialisein claims of this nature. Additional qualitative input, such as allowance forone-off occurrences or changes in legislation, policy conditions or portfoliomix, is also used in arriving at the best estimate of claims with the input ofinternal actuaries. At the early stage of development of long-tail classes of business significantweight is given to changes in the rating environment and conditions on renewalof policies in arriving at ultimate claims costs. Provisions are calculatedallowing for reinsurance recoveries and a separate asset is recorded for thereinsurers' share, having regard to recoverability. (ii) Amount, timing and uncertainty of cash flows Future cash flows are estimated by taking the estimated cost of outstandingclaims, plus liabilities incurred in the future, and spreading these amountsover future calendar years based upon payment patterns observed from pastexperience. The payment patterns are essentially probabilistic and will allow for situationswhere significant reserves are settled in one time period, where that timeperiod is unknown. For example, claims arising for events surrounding Enron maywell settle over a relatively short period, but at present it is not clear whenthat period will start. The payment pattern applied will spread the paymentsover the potential settlement period. The uncertainty in the projected cash flows will be high because it is derivedfrom both the uncertainty in reserves and the uncertainty in the paymentpatterns of the cash flow projected in an individual time period. (iii) Sensitivity analysis The insurance contract liabilities are the result of a process that blendsstatistical analysis of historical data with subjective interpretation ofqualitative information. These liabilities will therefore be sensitive tolimitations of the available data, and to the subjectivity employed ininterpreting both the qualitative and quantitative information. For example,certain potential scenarios may not be adequately represented in the data. Thebusiness written by the Group is diverse, and each line of business is analysedseparately so that to a large degree the sensitivity within any one class willbe immaterial at the Group level. Also, the diverse nature of the portfoliomeans that the potential downside risk within one class of business may beoffset by upside potential in another. There are, however, a number of areas in which the sensitivity is potentiallymaterial at the Group level. These are considered below: (a) Liability reinsurance Shortcomings in the data provided by the ceding companies mean that reservingfor this class of business is particularly subjective. The account was scaleddown in 2001 and ceased underwriting in 2002 so as time passes the uncertainty,and therefore the sensitivity of the Group result to the assumptions made forthis class, is reducing. Nevertheless, significant uncertainty remains at thepresent time. It was in recognition of this that the Group established anadditional provision for the Discontinued Businesses (of which liabilityreinsurance makes up by far the largest part). This was established afterconsidering alternative runoff scenarios and so provides some indication of thesensitivity of the syndicate level insurance contract liabilities to theassumptions made. The existence of the provision serves to shift the balance ofprobabilities relative to the liabilities held in the syndicate, and inparticular reduce the downside potential, although it is possible to constructscenarios that are worse than that underlying the provision so some downsiderisk remains. (b) Investment banking reserves The Group has significant exposures to US investment banks which have beenaffected by events surrounding Enron and Worldcom, as well as IPO ladderingissues. Estimates of insurance contract liabilities for these potentialexposures have been established in consultation with the Group's legal advisors,based upon their views as to the likely outcome of the various legal cases andsettlement negotiations. During the course of 2006 settlements were reached onsome of these expenses and therefore the sensitivity has reduced relative to theend of 2005. Nevertheless, uncertainty remains although this is reducedsignificantly by reinsurance. 26. Financial liabilities (a) Convertible bond Novae Holdings PLC issued 500,000 7 per cent. convertible bonds at a nominalvalue of £50 million on 15 December 2003. On 18 May 2006 the liability due onthese bonds was transferred to Novae Group plc. The bonds mature five years from the date of issue at their nominal value of £50million or can be converted into shares at the holder's option at the rate ofone ordinary share per 55.66p (nominal value) (adjusted from 61.22p with effectfrom 22 May 2006) of convertible debt. Bondholders can convert their bonds toshares at any time until 9 December 2008. The fair value of the liability component and the equity conversion componentwere determined at issuance of the bond. The fair value of the liabilitycomponent was calculated using a market interest rate for an equivalentnon-convertible bond net of issue costs of £2.1 million. The residual amount,representing the value of the equity conversion component, is included inshareholders' equity. £mNominal value of convertible bond issued on 15 50.0December 2003Equity component (5.5)Issue costs deferred (2.1)Liability component on initial recognition 42.4Interest expense 13.3Interest paid (10.5)Amortisation of issue costs 1.3Liability component at 31 December 2006 46.5Liability component at 31 December 2005 45.5 (b) Loan notes During 2004, the Group issued $36.0 million of 30 year floating rate notes asfollows: Issue date Maturity Earliest Margin date redemption rate above date 3 month US LIBOR per annum $15.0 million floating rate 30 June 2004 30 June 15 August 2009 3.50%notes 2034$11.0 million floating rate 30 June 2004 30 June 15 August 2009 4.05% 2034subordinated notes$10.0 million floating rate 22 September 30 June 19 November 3.50%notes 2004 2034 2009 The notes constitute direct, unsecured and unsubordinated obligations of theissuer ranking pari passu, without any preference amongst themselves, with allother existing and future unsecured unsubordinated debt of the issuer. Issuecosts of £0.5 million are being amortised on an effective interest rate basis asat inception. Interest is payable on a quarterly basis in arrears. The notes arelisted on the Irish Stock Exchange. Forward contracts are used to match exposureto fluctuations in foreign exchange rates and interest rates in respect of the$15.0 million and $11.0 million loan notes. The loan notes are denominated in USdollars with the interest payable pegged to the US LIBOR. The forward contractswhich mature on the same date as the interest is due for payment on the loanshave the effect of hedging 100% of the interest rate and foreign exchange raterisks. (c) Revolving credit facility Novae Group has available a revolving credit facility from one of its bank of£20.0 million, none of which was drawn at 31 December 2006 (2005: £nil). 27. Insurance and other payables 31 31 December December 2005 2006 £m £m Arising from underwriting business 33.2 18.7Arising from service companies and other subsidiaries 13.1 25.1Deferred income 1.3 15.3 47.6 59.1 The carrying value of insurance and other payables is a reasonable approximationof their fair value. 28. Retirement benefit obligations For certain staff employed by the Group prior to the merger with CLM and for allemployees joining the Group thereafter the Group operates the Novae GroupRetirement Benefit Scheme ("RBS"). The RBS was established with effect from 1September 1995 by the Group's managing agency subsidiary. It is a definedcontribution scheme and will provide benefits based upon the level ofcontributions made. The contributions of employees to the RBS are at the rate of5% salary. Novae's contributions are dependent upon age and range from 11.0% to18.5% of salary. No additional contributions were made during the year inrespect of directors. The funds of the RBS are independent of the Group's assets. The pension chargeof the Novae Group for the year was £1.9 million (2005: £2.4 million). Therewere no contributions outstanding or prepaid at 31 December 2006 (2005: £nil). 29. Capital and reserves Reconciliation of movement in capital and reserves Share Share Merger Other Profit Equity Total capital premium reserve reserves and loss component of account account convertible bond £m £m £m £m £m £m £m Balance at 1 114.4 83.6 - 63.4 (138.9) 5.5 128.0January 2005Loss for the - - - - (17.1) - (17.1)yearMovement in - - - - 1.5 - 1.5treasury sharesAs at 31 114.4 83.6 - 63.4 (154.5) 5.5 112.4December 2005 Profit for the - - - - 21.5 - 21.5year Increase in - - - - 2.9 - 2.9share basedpayment reserveAcquisition of - - - - (0.7) - (0.7)treasury shares Groupre-organisation (77.8) (83.6) 69.6 91.8 - - - Rights issue 36.6 67.1 - - - - 103.7As at 31December 2006 73.2 67.1 69.6 155.2 (130.8) 5.5 239.8 Share capital Ordinary shares of 10p Preference shares Deferred shares of £1 of 40p Number £ Number £ Number £Authorised31 December 2005 572,023,200 57,202,320 - - 194,494,200 77,797,680- Novae HoldingsPLC (formerly SVBHoldings PLC)31 December 2006 3,499,500,000 349,950,000 50,000 50,000 - --Novae Group plc Issued and fullypaid31 December 2005 366,106,728 36,610,673 - - 194,494,200 77,797,680Cancellations - - - - (194,494,200)(77,797,680)18 May 2006- 366,106,728 36,610,673 - - - -Novae HoldingsPLC On formation of 2 2 - - - -Novae Group plcOn redesignation 18 - 50,000 50,000 - -Group 366,106,708 36,610,673 - - - -reconstruction -shares in NovaeHoldings PLCexchanged forshares in NovaeGroup plcRights issue 366,106,728 36,610,673 - - - -31 December 2006 732,213,456 73,221,348 50,000 50,000 - - The preference shares are redeemable at any time at the option of Novae GroupPlc. The premium on redemption is £nil. They carry no voting or dividend rights. The Group has also issued share options (see note 15c). The authorised and issued deferred shares in Novae Holdings PLC (formerly SVBHoldings PLC) ("the deferred shares") were created in the context of the capitalreorganisation approved by shareholders on 27 May 2003 and were designed toenable the re-designation of each of Novae Holdings PLC's ordinary 50 penceshares, as they then were, into one 10 pence ordinary share and one 40 pencedeferred share. The deferred shares carried no voting, dividend or other rightsand had no commercial value. The authorised and issued ordinary 10 pence shareswere similarly created in the capital reorganisation approved by shareholders on27 May 2003. The deferred shares were cancelled on the effective date of thescheme described below. On 18 May 2006 under a scheme of arrangement between Novae Holdings PLC(formerly SVB Holdings PLC), the former holding company of the Group, and itsshareholders under Section 425 of the Companies Act 1985, and as sanctioned bythe High Court, all the issued shares in that company were cancelled and thesame number of new shares were issued to Novae Group plc in consideration of theallotment to shareholders of one ordinary share in Novae Group plc for eachordinary share in Novae Holdings PLC held on the record date, 17 May 2006. Inthe above table the figures up to 18 May 2006 relate to shares in Novae HoldingsPLC. Subsequent movements relate to shares in Novae Group plc. Novae Group plc was incorporated on 12 January 2006, under the name SVB NewcoPLC, with an authorised share capital of £50,000 and 2 issued ordinary shares of£1 each. The ordinary shares carry full voting and dividend rights. On 15 May 2006: (i) the authorised capital was increased from £50,000 to £350,000,000 by thecreation of an additional 349,950,000 ordinary shares of £1 each; (ii) £50,000 of unissued ordinary shares of £1 each were redesignated asnon-voting redeemable preference shares of £1 each, which were then issued; (iii) the remaining ordinary shares of £1 each were sub-divided into 10 ordinaryshares, having in each case the rights set out in the Articles of Association. Thus, at 18 May 2006, the balance sheet of Novae Group plc was as follows: £AssetsCash and cash equivalents 50,002 Equity and liabilitiesIssued capitalOrdinary shares of 10 pence each 2Non-voting redeemable preference shares 50,000of £1 eachTotal equity 50,002 On 18 May 2006 as part of the scheme of arrangement noted above, a further366,106,728 ordinary shares of 10 pence were issued, whereby Novae Group plc wasinterposed as the new holding company of the Novae Group. As required by Section131 of the Companies Act 1985 (Merger Relief), no share premium was recognised.The valuation of these shares totalled £106.2 million; the balance over thenominal value is £69.6 million which is classed as a merger reserve. Costs ofthe scheme of arrangement of £1.5 million are included in the income statement. Novae Group plc then undertook a one-for-one rights issue, whereby a further366,106,728 ordinary shares of 10 pence were issued, at a premium of £67.1million. Prior to the Group reconstruction, Novae Group plc was an inactive company, andthe acquisition therefore added no additional profit or loss to the Novae Group. Other reserves These comprise: 1) A non-distributable merger reserve which represents the premium created onmerger with CLM Insurance Fund plc in 1999 (£61.9 million). 2) A capital redemption reserve of £1.5 million, being a non-distributablereserve relating to the acquisition of shares for cancellation. In 1999 0.5 million shares were acquiredand then cancelled at a cost of £0.3 million. In 2000 2.5 million shares wereacquired and then cancelled at a cost of £1.2 million. 3) In the current year deferred shares of £77.8 million were cancelled asdescribed above. 4) The remaining reserve balance of £14.0 million relates to share premium heldby Novae Holdings PLC. Equity component of convertible bond This represents the equity component of the Group's convertible bond issued in2003. See note 26(a). 30. Contingencies and other commitments (a) If at 31 December 2006 the Group's corporate member subsidiary, NovaeCorporate Underwriting Limited, or the corporate members disposed of in 2000,namely Syndicate Capital Nos 1-5 Limited and CLM A-H, J and K, failed to meetany of its or their Lloyd's obligations, Lloyd's will: (i) be entitled to require Novae Holdings PLC (formerly SVB Holdings PLC) andits other subsidiaries (being all of Novae Group save Novae Group plc, NovaeInsurance Company Limited, Novae Group SIP Trustee Company Limited and NovaeManagement Limited) to cease or reduce their underwriting; and/or (ii) having regard to the fact that the Central Fund may be applied to dischargethe obligations of the defaulting subsidiary, be entitled to require each of theother corporate member subsidiaries to make contributions to the Central Fund upto the amount of their respective net profits held from time to time in premiumstrust funds, sufficient to reimburse the Central Fund in full for any paymentmade on behalf of the defaulting member. At the date of these financialstatements the directors are not aware of any of its corporate membersubsidiaries failing to meet any of its Lloyd's obligations. (b) Certain of the Group's assets are used as security for covenants used asFunds at Lloyd's by the corporate member subsidiary members. The assets chargedto Lloyd's at 31 December 2006 comprise financial assets and cash with a valueof approximately £226.3 million. In addition Novae Holdings PLC has grantedLloyd's a floating charge over its entire assets and undertakings. In certaincircumstances the charged assets may be required to meet obligations topolicyholders should Novae corporate members be unable to do so. (c) On 19 August 1999, Novae Holdings, as the then ultimate parent company ofthe corporate members Syndicate Capital 1-5 Limited, entered into a guarantee infavour of a European reinsurer in respect of the performance of the obligationsunder the reinsurance contract of the same date covering the 1997 and 1998underwriting years. On 30 November 1999, Novae Holdings PLC, as the thenultimate parent company of the corporate members CLM A-H, J and K Limited,entered into a guarantee in favour of a European reinsurer on that date inrespect of the performance of the obligations under the reinsurance contract ofthe same date covering the 1997, 1998 and 1999 underwriting years. The Groupdisposed of the corporate members, Syndicate Capital 1-5 Limited and CLM A-H, Jand K Limited, on 10 March 2000 to Mayheld Limited. As part of this disposal,Syndicate Capital Underwriting Limited, a subsidiary of Novae Holdings PLC,agreed to indemnify Mayheld Limited and the shareholders of Mayheld Limitedagainst any loss, damage, costs, liabilities, claims, cash calls and expenses tothe extent that the same are not covered by the reinsurance contracts referredto above, expected to be £nil. (d) On 21 November 2002, Novae Holdings entered into a guarantee in favour of aBermudan reinsurer in respect of the obligations, including the payment ofpremiums due, of the Group's corporate member subsidiary, arising under anexcess of loss reinsurance contract provided by that reinsurer. On 25 September2002, Novae Holdings entered into a contract in favour of the European reinsurerreferred to in (c) above, providing an excess of loss indemnity in respect of ahigh level layer of risk covered by a successor reinsurance contract to thosereferred to above. 31. Status of the financial information The financial information set out above does not constitute the Company'sstatutory accounts for the years ended 31 December 2006 or 2005 but is derivedfrom those accounts. Statutory accounts for 2005 have been delivered to the registrar of companies,and those for 2006 will be delivered in due course. The auditors have reported on those accounts; their reports were unqualified,but both included a reference to the uncertainty of the level of gross lossreserves for discontinued units to which the auditors drew attention by way ofemphasis of matter without qualifying their reports. This uncertainty isfurther explained in note 25 of this financial information. The auditor's report was unqualified and did not contain statements undersection 237(2) or (3) of the Companies Act 1985. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Novae Group