Final Results Part 1 of 2

22nd Feb 2008 07:00

Advent Capital (Holdings) PLC22 February 2008 Part 1 of 2 Advent Capital (Holdings) PLC ("Advent" or the "Company") Advent, the specialist property insurance and reinsurance Lloyd's insurer, todayreports its 2007 final results. • Key highlights • Corporate objectives for 2007 met or exceeded • Profit before tax of £25.2 million • Return on equity of 21.6% • Successful first year of operation for Advent Re with underwriting profit of £4.9 million and no losses • Improvement in prior years' claims of £1.1 million • Recommendation to 2008 AGM to pay first dividend since listing of 1.25p per share • Financial summary 2007 2006 Profit before tax £25.2m £22.9mProfit after tax £19.2m £16.0mNet premiums earned £96.0m £81.7mCombined ratio 78% 74% (1)Earnings per share 4.7p 4.3pReturn on equity 21.6% 25.1%Net assets per share 26.7p 21.9pNet tangible assets per share 24.9p 19.9p (1) Combined ratio of 83% excluding underwriting profit on exchange of £7.0 million • Current trading outlook • 100% of Syndicate 780's 2008 capacity of £135 million • In line with management's expectations, trading conditions for 1 January 2008 renewals were competitive, with overall premiums written in line with plan • The Company's principal lines of business remain at attractive levels • Terms and conditions are generally holding firm despite downward pressure on rates for most classes and territories • Syndicate 780's and Advent Re's gross and net catastrophe exposures maintained in line with plan • Brian Caudle, Chairman of Advent Capital (Holdings) PLC commented: I am pleased to report another year of strong performance with return on equityof 21.6% and an underwriting combined ratio of 78%. Advent Re had a verysuccessful first year of operation with no claims. Although market conditionsare becoming more competitive, these are conditions where we have successfullytraded in the past while maintaining our underwriting discipline and focus onunderwriting profit. Advent Capital HoldingsKeith Thompson 020 7743 8200Chief Operating Officer Trevor Ambridge 020 7743 8200Chief Financial Officer Neil Ewing 020 7743 8250Investor Relations Fox- Pitt, Kelton 020 7663 6000Simon LawJonny Franklin-Adams Pelham Public RelationsCharles Vivian 020 7743 6672Polly Fergusson 020 7743 6362 CHAIRMAN'S STATEMENT I am pleased to report to our shareholders that we had another successful yearin 2007 and met our key financial objectives. We earned an after tax profit of£19.2 million with a return on shareholders' equity of 21.6%. Net assets pershare increased by 22% to 26.7p at 31 December 2007. We had strong underwriting performance in 2007 despite an increase inattritional catastrophe losses compared with 2006. All lines of business hadunderwriting profits, with the Non-Marine Reinsurance portfolio producing anunderwriting profit of £16.3 million, including Advent Re's contribution of £4.9million in a loss free year. Last year, I set out for the first time our corporate objectives for Advent.With our excellent performance in 2007, we successfully accomplished all ofthese objective, as recorded below. Key long term financial objectives 1) The Company seeks to earn in excess of a 20% return on shareholders' equity over time while accepting volatility in short term earnings arising from catastrophe events. We earned a 21.6% return on equity in 2007, the second consecutive year in which we have surpassed our target. 2) Advent is an underwriting driven company which seeks to write insurance and reinsurance business at an underwriting profit with a target underwriting profit of 15% to 20% over the insurance cycle. We had an excellent combined ratio of 79% and underwriting profit of 21% for 2007, excluding profit on exchange, despite a series of attritional catastrophe events. This was a 4 point improvement over our equivalent 2006 combined ratio of 83% and underwriting profit of 27%. 3) Advent seeks to establish prudent reserves such that it can accurately assess the ultimate results for an underwriting year of account within 18 months from the commencement of the underwriting year. We had an improvement in prior years' reserves of £1.1 million on net reserves of £145.6 million, a significant improvement from the adverse development of £7.3 million which we incurred in 2006, principally from the 2005 hurricanes. 4) The Company seeks to be soundly financed such that it can withstand a significant catastrophe event or series of catastrophes and remain in business to take advantage of the attractive market conditions which typically follow such events. We internally financed the additional capital of £12.6 million to support our 100% share of Syndicate 780's capacity for the 2008 year of account from interim profits on the 2006 and 2007 year of accounts, while providing in full for payment of our 2005 year of account losses. With the accomplishment of our shareholder return objectives for 2007, I am verypleased to report that the Board of Directors is recommending to shareholders atthe 2008 AGM, the approval of a dividend of 1.25p per share payable on 15 July2008. In 2007, we strengthened our financial position and now have two wholly ownedunderwriting platforms, Syndicate 780 at Lloyd's and Advent Re in Bermuda, bothof which performed well in 2007. We will continue with our plans to developAdvent Re over time into a reinsurance company of similar size and scale toSyndicate 780, which in 2008, will include the renewal of business with existingclients and the possible introduction of traditional property reinsurance and alimited amount of casualty reinsurance to broaden its business mix. Advent Re successfully completed its 2007 business plan despite a late start inunderwriting having only received our Bermuda licence on 27 December 2006. Withno major losses, Advent Re earned an underwriting profit of £4.9 million for2007. I would like to thank Advent Re's directors, clients and brokers fortheir support of Advent Re in its inaugural year. Although Syndicate 780 fell short of its premium targets in 2007, particularlyin new lines of business, the underwriting team led by Lloyd Tunnicliffe weresuccessful in growing the Property and Energy Insurance accounts and indeveloping more worldwide non USA reinsurance business. While 2007 was another good year for Advent, the business of insurance is stillone of bearing risk for return. We believe there will be significantly lessvolatility in the overall portfolio when a major catastrophe occurs as a resultof the changes in our business mix over the last two years. However, I remindyou that we are in the business of taking risk and, when major catastrophesoccur, our results will be affected. Outlook for 2008 I have never been more confident in Advent's prospects and its ability to meetthe challenges of the changing insurance market conditions which we currentlyface. Through Syndicate 780, we have traded successfully through many insurance cyclesand have strong long term client and broker relationships. Our underwritingteam has an average of 14 years experience with Advent and fully subscribes toits underwriting culture and discipline with a focus on making an underwritingprofit. At the end of 2007, we consolidated the underwriting teams into two divisionswith Duncan Lummis as Head of Reinsurance and Darren Stockman as Head ofInsurance. This allows us to better serve our clients and brokers incompetitive market conditions and increases our focus on these two coredivisions. We have maintained our specialist focus on insuring short tailproperty insurance and reinsurance risks, while seeking to build our worldwidepremium income. We now own all of the capacity for Syndicate 780 giving us greater flexibilityto adapt to changing market conditions and to choose the best location to writeour reinsurance business. Our underwriting portfolio reflects the move over the last two years to a higherproportion of property and energy insurance business such that the portfolio issplit approximately 50% insurance and 50% reinsurance. This profile means thatwe are likely to incur more attritional losses but, at the same time, reduce thelevel of volatility from exposure to major catastrophes from our reinsuranceunderwriting. We have a strong balance sheet with a conservative investment portfolio investedin short term government and government guaranteed securities. While ourinvestment returns will fall in 2008 as central banks cut interest rates, wewill not suffer capital losses on other riskier classes of investments in thesedifficult financial markets. We are also insulated from the difficulties in refinancing debt in currentmarket conditions with our long term debt having maturities in 2026 and 2035with no financial covenants or principal repayments prior to maturity. Our reserves are predominantly short tail property reserves with little exposureto the risk of adverse developments inherent in longer tail casualty reserves.We only write a small amount of casualty business, all on a limited basis, whichlargely insulates us from claims which may arise from the current credit marketturmoil. The weakness of the US dollar during 2007 affected our results as we write 75%of our premium in that currency. However, we do not consciously take foreignexchange risk on our balance sheet. We closely monitor our foreign currencypositions on a monthly basis to minimise any mismatches and resulting foreignexchange exposure. I look forward to 2008 with confidence knowing that Advent is in good shape tocompete in these competitive and challenging markets. Our underwritingfranchise has been built over many years and, while we are by no means immune tocompetition, we believe we are in a more secure position than many as we havelong-lasting historical client and broker relationships. In the last threeyears, well over 50% of our total client base has renewed with us year on year,and, for our core treaty book business over 64% has renewed. While we aresatisfied that market conditions in the main continue to be good, particularlyfor our reinsurance business, we will maintain our focus on underwritingprofitability and will be alert to the changing business environment that ourLloyd's and Bermuda operations may have to contend with. I would like to thank our shareholders, clients and everyone at Advent andAdvent Re for their immense support in 2007. Brian F CaudleChairman 21 February 2008 FINANCIAL SUMMARY 2007 2006 2005 2004 2003(1) £'m £'m £'m £'m £'m Gross premiums written 126.9 115.4 100.5 74.7 120.2 Net premiums written 106.2 88.2 62.9 63.7 91.0 Net premiums earned 96.0 81.7 65.1 69.2 88.7 Underwriting profit (loss) 20.9 21.1 (78.1) (0.8) 18.1 Profit (loss) before tax 25.2 22.9 (74.2) 5.2 18.8 Profit (loss) after tax 19.2 16.0 (51.9) 3.4 13.9 Return on equity (2) 21.6% 25.1% (68.4%) 6.4% 35.1% Per share amountsEarnings 4.7p 4.3p (30.3p) 3.2p 13.2p Dividend - - 2.75p 2.75p - Net assets 26.7p 21.9p 16.0p 50.5p 48.1p Net tangible assets 24.9p 19.9p 13.6p 45.4p 41.0p Operating ratiosClaims ratio 50% 53% 191% 74% 51% Expense ratio 28% 21%* 29% 29% 26% Combined ratio 78% 74%* 220% 103% 77% * Expense ratio of 30% and combined ratio of 83% excluding profit on exchange of £7.0 million (1) The Company was indemnified from loss in respect of certain syndicate'syears of account. The syndicate years of account subject to indemnity wereclosed by reinsurance into another syndicate in which the Company does notparticipate. The financial summary excludes the results of the syndicatessubject to indemnity in 2003. (2) Return on equity is calculated on opening shareholders' funds adjusted forthe weighted average effect of share issues and dividends during the year. Summary of 2007 results • Pre tax profit of £25.2 million reflecting strong underwriting performance with a combined ratio of 78%. • Net premiums written increased by 20% to £106.2 million in 2007 despite the US dollar which weakened by 8.7% during 2007. • Advent Re underwriting profit of £4.9 million with no claims. • Net notified loss ratio of 32.3% (excluding IBNR) for Syndicate 780's 2007 year of account at 31 December 2007, (2006: 17.3%) reflects incurred losses on 2007 catastrophes. • Improvement in prior years' claims of £1.1 million. • Decreased investment result, net of interest on debt, to £8.6 million in 2007 reflecting higher debt costs and falling interest rates in the last half of 2007. • Net foreign exchange gain of £0.9 million down from £4.0 million in 2006 reflecting the Company's policy of matching currency positions on a monthly basis. REPORT OF THE DIRECTORS The Directors present their Report together with the audited Company Accountsfor the year ended 31 December 2007. BUSINESS REVIEW Overview of the Company Advent Capital (Holdings) PLC (the Company) was listed on the AIM Market of theLondon Stock Exchange on 3 June 2005. Advent is a well-established reinsuranceand insurance company which has traded for more than 30 years through Syndicate780 at Lloyd's. Beginning in January 2007, the Company commenced underwritingthrough a wholly owned subsidiary, Advent Re, based in Bermuda. The Companypredominantly writes property insurance and reinsurance business, with itscatastrophe exposed reinsurance business increasingly balanced by its directinsurance and specialised lines classes including energy and marine excess ofloss. Advent Underwriting, a wholly owned subsidiary, manages Syndicate 780 with anunderwriting capacity of £135 million for the 2008 year of account, whollysupported by the Company. Advent Re, a Class 3 Bermuda reinsurer, underwrites alimited number of retrocessional contracts, a segment of the reinsurance marketin which the Company has participated as a leading underwriter for over 30years, and will seek to diversify its business written into traditional propertyreinsurance and a limited amount of casualty reinsurance in 2008. The Company primarily derives its income from participation in Syndicate 780'sresults and from profits from Advent Re's operations. Although the Company has historically outperformed the Lloyd's market, itsbusiness is exposed to periodic catastrophe claims, such as the impact of theunprecedented number and level of natural disasters during 2004 and 2005.Although the Company has significantly reduced its catastrophe exposures since2005 at syndicate level, if there are major catastrophe events, the Companywould expect to incur claims arising from such events which could lead to shortterm underperformance relative to general insurance markets. The Company seeks to maximise shareholder returns over the medium to long term,working hard to establish and maintain long standing relationships with itsclients and brokers and strives to offer the highest level of service andprofessionalism from both its underwriting and claims handling teams. 2007 Results For the year ended 31 December 2007, the Company's profit before tax was £25.2million, reflecting the absence of major catastrophes. This result includedincurred losses, net of reinsurance and reinstatement premiums, of £10.2 millionfrom a series of attritional catastrophe losses. For the year ended 31 December2006, the Company's profit before tax of £22.9 million reflected a benign claimsenvironment with minimal attritional catastrophe claims activity. Earnings pershare amounted to 4.7p for 2007 up 9% from 4.3p for 2006, while return onshareholders' equity was 21.6% for 2007 down from 25.1% for 2006 reflecting theissue of 37 million shares in December 2006 to capitalise Advent Re. The improvement in 2007 results compared with 2006 is due to higher earnedpremiums from the Company's increased share of Syndicate 780's underwritingcapacity in 2007 and from the profit from Advent Re's first year of operation.The 2007 results include an improvement in prior years' claims, net ofreinsurance recoveries and reinstatement premiums, of £1.1 million, asignificant improvement from adverse development of £7.3 million for 2006,principally relating to the 2005 hurricanes. Other factors include a net profit on exchange of £0.9 million for 2007 downfrom £4.0 million in 2006 as a result of the Company's policy of monitoring andminimising foreign currency mismatches on a monthly basis. Sources of income 2007 2006 2005 2004 2003 £'000 £'000 £'000 £'000 £'000 Underwriting profit 20,912 21,064 (78,098) (846) 18,083 Investment result 13,141 12,681 6,614 4,503 4,419 Interest on debt (4,558) (3,560) (1,153) - - Agency income 483 1,054 1,915 4,563 1,169 Corporate costs (4,748) (5,436) (3,540) (3,047) (10,896) Corporate profit (loss) on (69) (2,950) 77 - -exchange Sale of subsidiary - - - - 6,073 Pre tax profit (loss) 25,161 22,853 (74,185) 5,173 18,848 The Company primarily derives its pre tax profit or loss from underwritingactivities with the Lloyd's Managing Agency income diminishing in significanceas the Company has increased its share of Syndicate 780's capacity since 2005. Underwriting Review Gross premiums written increased by 10% to £126.9 million for 2007 from £115.4million in 2006 reflecting the increase in the Company's share of the capacityfor Syndicate 780 from 80% in 2006 to 83.7% in 2007 and Advent Re's grosspremiums written of £6.2 million. This was partially offset by the impact ofthe US dollar which weakened by an average of 8.7% during 2007. Approximately75% of the Company's premiums are written in US dollars. The increase in grosspremiums written primarily resulted from the Property Insurance and Energyaccounts with gross premiums written increasing by £4.1 million and £4.6 millionrespectively. Net premiums written increased by 20% to £106.2 million for 2007 from £88.2million in 2006. Net premiums earned increased by 17% to £96.0 million for 2007from £81.7 million in 2006. These increases primarily arise from the increasein the Company's share of the underwriting capacity of Syndicate 780 and AdventRe's 2007 premiums written and earned. For 2007, approximately £6.1 million ofnet written and earned premiums arose from the reinsurance to close premiumreceived from external Names on the closure at 31 December 2006 of Syndicate780's 2004 year of account and the increase in the Company's share of capacityfrom 47.7% for the 2004 year of account to 53.8% for the 2005 year of account.For 2006, the reinsurance to close premium only amounted to £0.7 million. At 31 December 2007, the Company had unearned premiums, net of deferredacquisition costs and reinsurance, of £22.6 million (2006: £14.4 million)representing potential pipeline profits after claims incurred which will beprincipally earned in 2008. The Property Insurance and Marine accounts represent approximately 70% of thenet unearned premiums reflecting the growth in these accounts over the last twoyears and the slower premium earning profile of the Property Insurance accountwith premiums from covers and binders earned over a 24 month period. Although 2007 has been characterised as a relatively uneventful year, there wasa notable increase in attritional catastrophe claims and industry insured losseswhen compared with 2006. Insured losses from named catastrophe events totalledan estimated US$25 billion in 2007 (2006: US$15 billion) against a ten yearannual average of US$29.1 billion (Source: Swiss Re/Sigma). Windstorm Kyrillwas the largest insured loss of 2007 at US$5.9 billion while the UK floodsexceeded £3.0 billion (Source: Munich Re/ABI). The Company's losses, net ofreinsurance and reinstatement premiums, from these two events, together with theAustralian storms and Californian wildfires (2007 Catastrophes), were £10.2million compared with minimal attritional catastrophe losses in 2006.Attritional catastrophe losses are part of the normal expected pattern of lossesfor our account. A higher frequency of attritional losses in any year erodesthe business plan catastrophe margin and effectively reduced the forecast profitfor the 2007 year of account when compared with the 2006 year of account. Since 2002 attritional catastrophe losses have accounted for an average of 5% ofunderwriting capacity or approximately 25% of our business plan catastrophemargin. We provide more detail in the section headed "Change in UnderwritingPortfolio Mix" of the changes in the Company's underwriting portfolio since2002, including the reduction in aggregate catastrophe exposures at Syndicate780 level and the impact which catastrophe losses, or absence of them, have hadon underwriting year profitability. The Company monitors the net notified loss ratio (excluding IBNR) on a year ofaccount basis as an indicator of the developing attritional loss experience andultimately underwriting year profits/losses. For the 2007 year of account at 31December 2007, the net notified loss ratio was 32.3%, (2006: 17.3%). Excludinglosses from the 2007 Catastrophes, the net notified loss ratio was 19.7%. Syndicate 780 - Net notified loss ratio at 12 months (excluding IBNR) Year of 1993 1994 1995 1996 1997 1998 1999 2000account% net 14.6% 24.7% 26.1% 27.0% 24.8% 38.9% 52.5% 33.7%notified Year of 2001 2002 2003 2004 2005 2006 2007account% net 94.7% 15.9% 14.6% 61.5% 133.1% 17.3% 32.3%notified Insurance Segment Review Details of the underwriting results for each business segment are set out below. 31 December 2007 Non-Marine Property Marine Syndicate 2 Total Reinsurance Insurance £'000 £'000 £'000 £'000 £'000 Gross premiums written 75,966 31,723 18,691 532 126,912 Net premiums written 61,292 27,785 16,461 661 106,199 Net premiums earned 57,862 24,358 13,103 661 95,984 Net claims incurred (28,645) (14,499) (6,497) 1,208 (48,433) Acquisition costs (8,495) (7,431) (2,915) (80) (18,921) Underwriting expenses (4,899) (2,046) (1,204) (506) (8,655) Profit on exchange 456 191 112 178 937 Underwriting profit 16,279 573 2,599 1,461 20,912 Claims ratio 49.5% 59.5% 49.6% (182.7%) 50.5% Acquisition costs 14.7% 30.5% 22.2% 12.1% 19.7% Underwriting expenses 8.5% 8.4% 9.2% 76.6% 9.0% Profit on exchange (0.8%) (0.8%) (0.9%) (26.9%) (1.0%) Expense ratio 22.4% 38.1% 30.5% 61.8% 27.7% Combined ratio 71.9% 97.6% 80.2% (120.9%) 78.2% Adjusted combined ratioexcluding profit on exchange 72.7% 98.4% 81.0% (94%) 79.2% Unearned premiums net ofdeferred acquisition costsand reinsurance 6,669 11,108 4,829 - 22,606 31 December 2006 Non-Marine Property Marine Syndicate 2 Total Reinsurance Insurance £'000 £'000 £'000 £'000 £'000 Gross premiums written 73,136 27,646 14,129 445 115,356 Net premiums written 52,632 23,835 11,205 529 88,201 Net premiums earned 54,899 16,888 9,378 529 81,694 Net claims incurred (25,472) (9,471) (7,857) (273) (43,073) Acquisition costs (9,304) (5,990) (2,365) (7) (17,666) Underwriting expenses (3,924) (1,483) (758) (717) (6,882) Profit on exchange 4,234 1,600 818 339 6,991 Underwriting profit (loss) 20,433 1,544 (784) (129) 21,064 Claims ratio 46.4% 56.1% 83.8% 51.6% 52.7% Acquisition costs 16.9% 35.5% 25.2% 1.4% 21.6% Underwriting expenses 7.1% 8.8% 8.1% 135.5% 8.4% Profit on exchange (7.7%) (9.5%) (8.7%) (64.2%) (8.6%) Expense ratio 16.3% 34.8% 24.6% 72.7% 21.4% Combined ratio 62.7% 90.9% 108.4% 124.3% 74.1% Adjusted combined ratioexcluding profit on exchange 70.4% 100.4% 117.1% 188.5% 82.7% Unearned premiums net ofdeferred acquisition costsand reinsurance 2,495 9,323 2,551 - 14,369 Non-Marine Reinsurance For the year ended 31 December 2007, the Non-Marine Reinsurance account hadanother strong performance with an underwriting profit of £16.3 million and acombined ratio of 71.9% despite incurring 2007 net Catastrophe losses of £6.9million, compared with an underwriting profit of £20.4 million and a combinedratio of 62.7% for 2006 which reflected the absence of catastrophe losses.Excluding the profit on exchange, the underwriting profit and combined ratio for2007 were £15.8 million and 72.7% respectively compared with £16.2 million and70.5% respectively for 2006. Gross premiums written increased by 4% to £76.0 million in 2007 from £73.1million in 2006, despite the impact of the US dollar which weakened by anaverage of 8.7% during 2007. Unearned premium, net of deferred acquisition costs and reinsurance, increasedto £6.7 million at 31 December 2007 from £2.5 million in 2006. Net unearnedpremium at 31 December 2006 included deferred reinsurance costs relating tocertain Original Loss Warranty (OLW) reinsurance contracts purchased in mid2006. Advent Re For the year ended 31 December 2007, Advent Re wrote £5.8 million (US$11.5million) of premiums, net of brokerage, of which £0.3 million (US$0.6 million)was included in unearned premium at 31 December 2007 on two policies whichexpire on 31 March 2008. Advent Re incurred no losses in its first year ofoperation resulting in an underwriting profit of £4.9 million (US$10.9 million)for 2007. Advent Re will continue to write OLW policies and traditional Ultimate Net Loss(UNL) policies in 2008 with aggregate limits of US$45 million for USA earthquakeand wind losses, US$15 million for European losses and US$15 million forJapanese earthquake and wind. The minimum attachment points for the OLW's areexpected to be US$15 billion for USA Wind, US$10 billion for USA and Japanesequake and US$7.5 billion for European losses, down from the attachment points in2007. The attachment points for UNL policies are at a similar market loss andmodelled return periods as for the OLW policies, recognising that attachmentpoints are estimates in terms of probability and size of the market loss for thereinsured companies. In January 2008, Advent Re renewed its expiring contractsfor US$7.5 million of premiums, net of brokerage. During 2008, Advent Re will seek to diversify its business written to includetraditional property reinsurance and a limited amount of casualty reinsurance inline with the Company's objective of ultimately having two platforms of similarsize and diversity of business. Property Insurance For the year ended 31 December 2007, the Property Insurance account had anunderwriting profit of £0.6 million and a combined ratio of 97.6% despite theimpact of 2007 Catastrophe net losses of £1.6 million, compared with anunderwriting profit of £1.5 million and combined ratio of 90.9% for 2006, all ofwhich resulted from profit on exchange. Excluding the profit on exchange, theunderwriting profit and combined ratio for 2007 improved to £0.4 million and98.4% respectively from an underwriting loss of £0.1 million and combined ratioof 100.4% respectively for 2006. Gross premiums written income increased by 15% to £31.7 million for 2007 from£27.6 million in 2006 despite the weaker US dollar, and reflects the Company'sstrategy since 2005 of growing this account to diversify its underwritingportfolio and to reduce the potential volatility of underwriting results. Netearned premiums increased by 44% to £24.4 million in 2007 from £16.9 million in2006 with approximately 51 of gross premiums written in 2007 remaining to beearned in 2008 reflecting the slower premium earning profile of this account.For 2007, gross premiums written for the Property Insurance account represented25% of the total gross premiums written for the Company, up from 10% of grosspremiums written in 2005. Unearned premiums, net of deferred acquisition costs and reinsurance, increasedto £11.1 million at 31 December 2007 from £9.3 million in 2006, most of whichwill be earned in 2008. Marine For the year ended 31 December 2007, the Marine account had a significantlyimproved performance with an underwriting profit of £2.6 million and a combinedratio of 80.2% despite the impact of a late claim notification of £2.2 millionin the first quarter of 2007 on Hurricane Rita. This compares with anunderwriting loss of £0.8 million and combined ratio of 108.4% in 2006 resultingfrom adverse development on the 2005 hurricane losses. Excluding profit onexchange, the underwriting profit and combined ratio for 2007 were £2.5 millionand 81.0% respectively compared with an underwriting loss of £1.6 million andcombined ratio of 117.1% respectively in 2006. This account has grown significantly from gross premiums written of £7.3 millionin 2005 to £18.7 million in 2007, primarily as the result of expansion of theoffshore energy portfolio. Unearned premium, net of deferred acquisition costsand reinsurance, increased to £4.8 million at 31 December 2007 from £2.6 millionat 31 December 2006. Syndicate 2 Syndicate 2 had an uneventful year with positive claims development of £1.2million principally resulting from the closure of old outstanding claims whichhad shown little or no activity in recent years. Reinsurance Recoverable The reinsurance recoverable on outstanding claims at 31 December 2007 decreasedto £18.2 million down from £33.3 million at 31 December 2006 reflectingcollection of reinsurance recoveries on the 2005 hurricanes. As set out in Note3 to the financial statements, only 12.1% of the reinsurance recoverable(excluding balances for which collateral is held) was from companies rated BBBor below and Non Rated. There were no new impaired reinsurance during 2007. Investment Performance 2007 2006 Total Company Syndicate Total Company Syndicate £'000 £'000 £'000 £'000 £'000 £'000 Financial investments 239,826 123,485 116,341 101,731 - 101,731Cash 26,978 13,535 13,443 141,654 138,214 3,440Total investments and cash 266,804 137,020 129,784 243,385 138,214 105,171 Investment result 13,141 7,250 5,891 12,681 6,748 5,933Interest on debt (4,558) (4,558) - (3,560) (3,560) -Net investment result 8,583 2,692 5,891 9,121 3,188 5,933 The investment result increased to £13.1 million for 2007 from £12.7 million in2006 principally due to an increase in cash and investments of £23.4 million,partially offset by a lower yield of 5.2% on average balance of cash andinvestments for 2007 compared with 5.5% in 2006. The Company's share of thesyndicates' portfolio of cash and investments has increased to £129.8 million at31 December 2007 from £105.2 million at 31 December 2006, principally due to thecash call on the 2004 year of account and positive cash flows from the 2006 and2007 years of account. Syndicate 780 paid profits of £11.1 million on the 2006year of account to the Company and received £19.4 million for the Company'sshare of the cash call on closure of the 2004 year of account. At 31 December 2007, the investment portfolio is virtually all invested ingovernment or government guaranteed securities given the Company's concernsabout taking credit risk in these turbulent financial markets. Neither theSyndicate nor the Company invest in asset backed or mortgage backed securities(ABS and MBS), equity or derivatives. Certain overseas deposits managed byLloyd's over which the Company has no investment control, have invested incorporate bonds, MBS and ABS as referred to in Note 4 to the financialstatements. The weighted average interest rate on outstanding debt at 31 December 2007 was8.8% down slightly from 9.19% at 31 December 2006, reflecting lower US interestrates at the end of the year. The increase in interest on debt for 2007reflects the December 2006 debt issue. Other Income Other income, representing agency fee income from third party names, decreasedin 2007, reflecting the reduced third party capacity on Syndicate 780. Other Expenses 2007 2006 £'000 £'000 Staff and related costs 1,909 2,051Profit related bonuses 556 1,230Other expenses 2,283 2,155 4,748 5,436 A profit related pay scheme based upon the annually accounted profit ofSyndicate 780 resulted in a total bonus expense for 2007 of £1.1 million (2006:£2.0 million), of which £0.6 million is included in corporate costs and thebalance in underwriting profit. Further details of the scheme are included inthe directors' remuneration report. Capital Management The Company's objective is to have sufficient capital to support its operationsto ensure future growth and expansion while providing a satisfactory return toshareholders given the potential short term volatility of its results due tomajor catastrophe events. The Company's underwriting is supported by Funds at Lloyd's (FAL) for Syndicate780 and by Advent Re's shareholder's equity for its Bermuda operations. Total FAL at 31 December 2007 was as follows: Advent Fairfax Year of FAL FAL Account £'m £'m Applicable Advent Capital Limited (ACL) 15.1 56.6 2001, 2002, 2005 Advent Capital (No. 3) Limited (ACL3) 84.7 - 2006 onwards Total 99.8 56.6 For Syndicate 780, the level of capital required is driven by the Lloyd'sIndividual Capital Assessment (ICA) process together with a market uplift in theindividual capital requirements of members as determined by Lloyd's, asnecessary to maintain is market rating, referred to as the Economic CapitalRequirement (ECR) process. The 2008 year of account has an ECR of 73% of capacity, up from 2007 ECR of 67%of capacity, principally due to expectations of a softening insurance andreinsurance market in 2008. The Company has £84.7 million of FAL and used £13.2million of undistributed interim profits from its 2006 year of account tosupport Syndicate 780's capacity of £135 million for 2008. ACL has FAL of £15.1 million for payment of losses on the 2005 and prior yearsof account, of which its share of the loss on closure of the 2005 year ofaccount is £29.5 million. The balance of £14.4 million will be paid fromholding company cash and pipeline profits at 31 December 2007 which will bereleased by Lloyd's by June 2008. In November 2000, the Company entered a Funding Agreement with Fairfax toprovide the Company with the use of £110 million of FAL to support itsunderwriting for the 2001 to 2005 years of account, which ceased at 31 December2005. The Company is responsible for the payment of any losses resulting fromthe use of this FAL. It is expected that Fairfax's FAL will be released as the2005 and prior years of account are closed. The Company has provided capital to its operating subsidiaries using permanentcapital and unsecured long term debt financing. The long term debt is notcallable for five years from date of issue and has no financial covenants otherthan the quarterly payment of interest and payment of principal on maturity. Inthe case of the Company's US dollar and Euro denominated subordinated debt due 3June 2035, amounting to an aggregate of £25.1 million at 31 December 2007, theCompany has the ability to defer interest payable for 20 consecutive quarterswithout causing an event of default. The Company seeks to maintain its ratio oflong term debt to total capital at less than 35% with the objective of reducingthat ratio over the next five years through accumulated earnings or as theexpiry of the 'No call' provisions on its debt provide it with an ability torefinance or repay its senior loan notes. Capital Table 2007 2006 £'000 £'000 Long term debt- subordinated 25,085 24,675- senior 22,262 22,607 47,347 47,282 Shareholders' equity 108,398 88,986 Debt to equity ratio 44% 53% Debt to total capital ratio 30% 35% Interest coverage 7 x 7 x The reduction in the debt to total capital ratio from 35% in 2006 to 30% in 2007results from the Company's strong earnings in 2007. 2008 Business Plans and Outlook Syndicate 780 Syndicate 780's Business Plan has a gross premium income target of £114.3million at Lloyd's Premium Income Monitoring (PIM) exchange rates of US$1.92/£1.00 and continues its focus on its property insurance and reinsurancebusiness. Key components of the 2008 Plan are set out below at PIM and current rates ofexchange: 2008 2008 Plan Plan Exchange rate $1.92/£ $2.00/£ ReinsuranceTreaty 40.3 39.2Assumed 12.9 12.6Marine 2.2 2.1Aviation 1.1 1.1Casualty and other 3.1 3.2 59.6 58.2 InsuranceProperty 36.5 35.7Energy 16.0 15.4Cargo and other 0.8 0.8Personal Accident 1.4 1.3 54.7 53.2 114.3 111.4 Syndicate 780's 2008 Business Plan reflects an expected softening in pricing,terms and conditions in light of the absence of major catastrophes to date,particularly in the United States. The 2008 Business Plan's return on capacityis 18.5% (before change in managing agency fees) net of a margin for catastrophelosses of 18% of capacity. Based on the 31 December 2007 exchange rate of US$2.00/£, the Company's 100%share of Syndicate 780's gross premium income for the 2008 year of account of£111.4 million is a 19% increase from its 83.7% share of forecast gross premiumincome for the 2007 year of account of £93.9 million with the increase incapacity to 100% for 2008 more than offsetting the effects of the weaker USdollar and expected market conditions. 1 January 2008 renewals Premiums written during January 2008 were slightly ahead of our business plan.The Non-Marine Reinsurance account was well ahead of plan with premiums writtenof £39.3 million from increased shares on a number of accounts and no loss ofsignificant accounts. The Property Insurance account is below plan withpremiums written of £12.0 million reflecting softening market conditions.Overall, pricing was down an average of 6% on renewals across the portfolio, inline with business plan expectations. Non-Marine Reinsurance Account The rating environment at 1 January 2008 was in line with our expectations.Rates for USA regional non coastal exposures were down 10% to 15% on average,while rates for coastal exposures were down 5% to 10%. Reinsurance rates forUSA nationwide insurers were generally down 5% reflecting tighter capacityavailable for multiple peril and zone exposures. International rates were downapproximately 5%. In general, the market has held firm on terms and conditions,particularly deductibles, but some clients were seeking multi year contracts andbroader coverages. Property Insurance Account UK and Australian property insurance rates started to see modest increases by upto 5% as a result of the 2007 Catastrophes. In all other territories, ratescontinue to be under pressure with USA middle market pricing down by 5% to 10%while open market business pricing was down by up to 20%. Marine Rates for Gulf of Mexico exposures were unchanged while pricing elsewhere hasdecreased by 5% to 10%. We do not expect the Property Insurance and Marine accounts to continue growingin 2008 as a result of increasing competition and our focus on underwritingprofitability. Syndicate results update The 2005 YOA will be closed at a loss of 74.37%, within previous forecasts. The forecast results for Syndicate 780's open years of account are set outbelow, including the 2007 year of account for which an initial forecast wouldnormally be made in the second quarter of 2008. An early indication of thepotential result is appropriate, recognising that the forecast result will beaffected as the remaining premium income is earned in 2008. Year of Current forecast result Previous forecast result Advent syndicate Account participation 2006 Profit 20% to 25% Profit 20% to 25% £122.8 m 2007 Profit 15% to 20% N/A £126.0 m Catastrophe Exposure Management A key underwriting principle is that we maintain our catastrophe exposures forSyndicate 780 to any one of the Lloyd's Realistic Disaster Scenarios (RDS)within the Lloyd's franchise guidelines of a gross loss of 75% of capacity and anet loss of 20% of capacity. Our objective is to allow for a margin of safetyfrom the Lloyd's guidelines to allow for potential variations in actualcatastrophe events compared with the RDS. Syndicate 780's budgeted catastrophemargin, for the 2008 year of account, is approximately 18% of capacity. Smallerattritional catastrophe losses will erode the catastrophe margins available toabsorb the impact of a major catastrophe. From 2002 to 2007, attritionalcatastrophe losses absorbed, on average, 25% of the budgeted catastrophe margin. Following the 2005 hurricanes, the Company took a strategic decision to reducethe 'high volatility' of Syndicate 780's results by reducing peak aggregateexposure to major catastrophes, a process which has taken place since 2006. Weset out below the estimated 1 January 2008 net loss exposure as a percentage ofcapacity to major RDS scenarios to which we are exposed compared with Syndicate780's 2008 business plan and its estimated net loss exposure at 1 April 2005.In April 2006, Lloyd's also revised upward the industry loss assumptions for anumber of benchmark catastrophe events within their RDS guidelines. Florida Wind Los Angeles European Japan Quake Gulf of USA North East Quake Wind Mexico Wind Industry loss- April 2005 $71 bn $72 bn $31 bn $51 bn $61 bn N/A Estimated net lossas % capacity 30% 16% 38% 21% 33% N/A(2005 YOA) Industry loss- January 2008 $119 bn $74 bn $31 bn $51 bn $113 bn $74 bn Estimated net loss as % ofcapacity- January 2008 13% 16% 18% 14% 20% 18% - 2008 plan 15% 16% 19% 13% 18% 18% Management have continued with the strategy to reduce the volatility ofSyndicate 780's results. By way of example, the estimated net loss from a Gulfof Mexico RDS at syndicate level has decreased from US$97 million at 1 April2005 to US$54 million at 1 January 2008, including a reduction in aggregateexposure on the Assumed account by US$225 million to US$19 million. With the Company's increased share of Syndicate 780's capacity from 53.8% forthe 2005 year of account to 100% for the 2008 year of account and Advent Re, theCompany's overall exposure net of reinsurance and reinstatement premiums butwithout consideration of catastrophe margins, to a Gulf of Mexico RDS haschanged as follows: 1 January 2008 1 April 2005 £m £m Syndicate 780 26.9 27.1(ACH share) Advent Re 11.4 - Pre tax loss 38.3 27.1 After tax loss 30.7 19.0 Percentage of shareholders' equity,beginning of year 28.3% 36.1% The pre tax exposure has increased to £38.3 million at 1 January 2008 from £27.1million at 1 April 2005 with the reduction in Syndicate 780's catastropheexposures more than offset by the increase in capacity ownership and Advent Re'swriting of US retrocessional business. Advent Re's loss exposures have not beentax effected as it is a non UK resident corporation. Although, the after taxloss on the Gulf of Mexico RDS has increased to £30.7 million at 1 January 2008from £19.0 million at 1 April 2005, it has decreased to 28.3% of shareholders'equity at 1 January 2008 from 36.1% at 1 April 2005. Change in Underwriting Portfolio Mix Following the 2005 hurricanes, Syndicate 780 has changed its underwritingportfolio by increasing the Property Insurance and Energy accounts as aproportion of the overall portfolio while eliminating the US catastrophe exposedretrocessional business in the Non-Marine Reinsurance Account. The following table sets out, on an underwriting year basis from 2002 to 2007,Syndicate 780's gross premiums written, by segment excluding reinstatementpremiums. The Treaty reinsurance and Assumed segments of the Non-MarineReinsurance account are shown separately to show the change in portfolio mix. 2002 2003 2004 2005 2006 2007 Division TreatyReinsurance 39% 30% 35% 36% 37% 40% Property 14% 11% 17% 18% 26% 30% Energy 0% 12% 4% 5% 9% 15% Assumed 47% 47% 44% 41% 28% 15% Over this period from 2002 to 2007, the Treaty Reinsurance account has remainedsteady at approximately 40% of the overall portfolio. The Property Insuranceaccount has increased from 14% of the portfolio in 2002 to 30% of the portfolioin 2007, the Energy account has grown to 15% of the portfolio while the Assumedaccount has decreased from 47% of the portfolio in 2002 to 15% in 2007 (largelymade up of non USA worldwide business). The following table sets out the aggregate underwriting contribution for each ofthe lines of business during three time periods: a) 2002/2003 underwriting years which experienced a benign claims environment (2002/2003 Period) b) 2004/2005 underwriting years with seven major US hurricanes (2004/ 2005 Period) c) 2006/2007 underwriting years with a generally benign claims environment except for a series of smaller catastrophes in 2007 (2006/2007 Period) Division 2002-2003 2004-2005 2006-2007 Treaty Reinsurance 30% 0% 34%Property 5% 0% 11%Energy 5% 14% 19%Assumed 60% 86% 36% The underwriting contribution of the Assumed segment accounted for 60% of totalunderwriting contribution in the 2002/2003 Period while the Property Insurancesegment underwriting contribution was relatively modest at 5% of the total. During the 2004/2005 Period, although the Treaty Reinsurance and Energy accountsincurred significant losses, 86% of the aggregate underwriting loss arose fromthe Assumed account. A major factor in the size of the loss was the Syndicate'spolicy of writing this class largely on a net basis. During the 2006/2007 Period, the aggregate underwriting contribution is morebalanced with approximately one third carrying from each of the TreatyReinsurance, Assumed and combined Property and Energy Insurance accounts. Theoverall profitability of these years of account is in the range of 15% to 25% ofcapacity (recognising that the 2007 year of account is not yet fully earned)compared with a return on capacity of 27.5% and 33.3% for the 2002 and 2003years of account respectively, when the Assumed account was a bigger proportionof the portfolio. Although the Syndicate has given up some of the upside that can be earned fromthe Assumed account in underwriting years which experience a benign claimsenvironment, management believes that losses in underwriting years with majorcatastrophes should be much lower, with the Syndicate having shed US$225 millionin US catastrophe exposure on the Assumed account. Dividend Policy In its 2006 Report and Accounts, the Company stated that it intended toreinstitute a dividend at the 2008 AGM if we accomplished our shareholderobjectives in 2007. We have successfully accomplished our shareholderobjectives and accordingly, the Board of Directors has recommended a 1.25pdividend to be approved at the 2008 AGM, payable on 15 July 2008 to shareholderson record at 15 June 2008. The Board Executive Directors Brian Caudle (aged 72) - Executive Chairman Mr Caudle is the founder of Advent Underwriting Limited (Advent Underwriting)and is co-founder of the Company and Advent Capital Limited. He has over 50years experience in the Lloyd's Market and was the Active Underwriter ofSyndicate 780 from 1974 to 1999. Mr Caudle is the Executive Chairman of theCompany and was the Director of Underwriting of Advent Underwriting until 13December 2006. Mr Caudle became a Director for the newly formed Advent ReHoldings Limited and Advent Re (a Bermuda Class 3 reinsurer) on 8 November and22 December 2006 respectively. Mr Caudle is also a Director of other companieswithin the Advent Group. Keith Thompson (aged 50) - Chief Operating Officer Mr Thompson is co-founder of the Company and Advent Capital Limited. He has over30 years experience in the Lloyd's Market. He began his career with theCorporation of Lloyd's in 1976. From 1983 to 1994 he held senior positions anddirectorships of a number of Lloyd's members agents before joining AdventUnderwriting in July 1994. In 1995 he was appointed Managing Director of AdventUnderwriting. Mr Thompson is also a Director of other companies within theAdvent Group. Trevor Ambridge (aged 48) - Chief Financial Officer Mr Ambridge joined the Board of the Company in 2002 as a non-executive directorand, with effect from 1 June 2006, was appointed as the Chief Financial Officer. He remains a Vice President of Fairfax Financial Holdings Limited and waspreviously a partner with Coopers & Lybrand, Toronto. Mr Ambridge was Presidentand a member of the Council of the Ontario Institute of Chartered Accountantsbetween 1989 and 1996. Mr Ambridge was elected as a Fellow of the OntarioInstitute of Chartered Accountants in 1994. Non-Executive Directors Brian Rowbotham (aged 76) - Non-Executive Director Mr Rowbotham joined the Board of the Company in 1995 and is also a Non-ExecutiveDirector of Advent Underwriting, Advent Capital Limited and Advent GroupServices Limited. He was Chairman of Charterhouse Communications PLC, an AIMlisted company from 1987 to 2005, and a Director of two main listed companiesbeing Deputy Chairman of the Adscene Group PLC between 1987 and 1994, andChairman of Allied Radio Plc from 1994 to 1996. Mr Rowbotham is a Fellow of theInstitute of Chartered Accountants of England and Wales. Mr Rowbotham is also aNon-Executive Director of other companies within the Advent Group. Eric Stobart (aged 59) - Non-Executive Director Mr Stobart joined the Board on 6 January 2006. He is Senior Group Adviser atLloyd's TSB Group PLC and is also a Non-Executive Director of Throgmorton TrustPLC, Utilico Limited and CMGL Syndicate Management Limited. Mr Stobart is aFellow of the Institute of Chartered Accountants of England and Wales. He waspreviously successively a Corporate Finance Director, Group Finance Director andChief Executive of Hill Samuel Bank. Peter Stormonth Darling (aged 75) - Non-Executive Director Mr Stormonth Darling joined the Board of the Company on 9 November 2005. He wasChairman of Mercury Asset Management Group (now BlackRock Merrill LynchInvestment Managers) from 1979 to 1992, and a Non-Executive Director until 1998.He is a Director of Invesco Perpetual Select Investment Trust, Howard de WaldenEstates and other companies in the UK, US and Canada. COMPANY SECRETARY Giuseppe Perdoni (aged 43) Mr Perdoni was appointed Company Secretary with effect from 1 January 2007. Hehas been with the Company since 1996 and is a Director of Advent Underwriting.He was previously a Principal Regulatory Officer within the Corporation ofLloyd's Regulatory Department. Mr Perdoni qualified as a Chartered Accountantin 1991 and was admitted as an Associate of the Chartered Insurance Institute in1995. Directors and their Interests in Shares The Directors and their beneficial interests (including any interests of theirspouses) in the share capital of the Company during the year were as follows: Number Held at 1 January 2007 and 31 December 2007 T J Ambridge Ordinary 5p shares 460,000B F Caudle Ordinary 5p shares 2,341,205K D Thompson Ordinary 5p shares 430,000B W Rowbotham Ordinary 5p shares 275,743E St C Stobart Ordinary 5p shares 30,000P Stormonth Darling Ordinary 5p shares 100,000 B F Caudle also has controlling interests in the share capital of CharlburyInvestments Limited and Stellawell Limited which have the following interests inthe share capital of the Company: Number Held 1 January 2007 and 31 December 2007 Charlbury Investment Ordinary 5p shares 2,035,541LimitedStellawell Limited Ordinary 5p shares 11,335,703 K D Thompson also has a controlling interest in the share capital of JacgoraInvestments Limited, which has the following interest in the share capital ofthe Company: Number Held 1 January 2007 and 31 December 2007 Jacgora Investments Ordinary 5p shares 1,590,014Limited Investor Relations The Investor Relations Officer, Neil Ewing, manages the Company's investorrelations programme. Meetings are held with major shareholders and analystsduring the year including the period following reporting of interim and year endaccounts, and other major transactions or events. The Company's website (www.adventgroup.co.uk) provides a comprehensive set ofinvestor relations software tools enabling shareholder and investors to downloadgroup data. Substantial interests The following interests of 3% or more of the issued ordinary share capital hadbeen notified to the Company as at 31 December 2007: Fairfax Financial Holdings and subsidiaries 44.46%Phoenix Asset Management Partners 17.01%Avenir Corporation 7.16%Mackenzie Cundill Investment Management Limited 6.57%Amber Master Fund (Cayman) SPC 6.02%Zenith Insurance Company 5.42%Brian F Caudle 3.86%International Long/Short Fund LP 3.28% Charitable Donations During 2007 the Company made a donation of £1,250 to Lloyd's Charities Trust.No donations were made for political purposes. Creditor payment policy The Company aims to pay all of its creditors promptly and in accordance withcontractual and other legal obligations. Corporate Governance Reports The Company continued its commitment to maintaining effective corporategovernance during 2007. While companies on the AIM market are not obliged tocomply with the Combined Code, the Company wishes to apply best practice inrelation to Corporate Governance and aims to comply with the Combined Code asmuch as practicable, having regard to the Company's size, complexity and stageof development. The Board has the authority, and is accountable to shareholders, for ensuringthat the Company is appropriately managed and achieves the corporate objectivesit sets. In order to fulfil its responsibilities, the Board meets on a regularbasis and has a formal schedule of matters specifically reserved for itsconsideration and decision. The schedule of matters reserved for the Boardprovides that the Board's role encompasses the overall management of the Companyand its subsidiaries including approval of long term strategy and objectives,oversight of operations, ensuring maintenance of a sound system of internalcontrols and risk management, decisions relating to any changes in the Company'scapital structure or of management and approval of any significant expenditure.When directors are unable to attend a meeting, they are advised of matters to bediscussed and given an opportunity to make their views known to the Chairmanprior to the meeting. During the period until 31 December 2007, the Board has at any one timecomprised three Executive Directors, namely Mr Caudle, Mr Thompson, and MrAmbridge and three Non-Executive Directors, namely, Mr Rowbotham, Mr StormonthDarling and Mr Stobart. The Non-Executive Directors share the responsibility for the execution of theBoard's duties by taking an essentially supervisory role. Non-Executives aretherefore chosen for their broad and complementary experience in relation to theExecutive Directors, as well as their independence. The key elements of the roleand responsibilities of the Non-Executive Directors are: • Supervision of, and advice to, the Executive Directors • Evaluation of Executive Directors' performance • Remuneration of Executive Directors • Monitoring of the effectiveness of controls • Governance and compliance These roles and responsibilities are carried out through membership of the GroupAudit, Group Investment, Remuneration and Nomination sub-committees. Membershipof, and attendance at, the committees is set out below. The terms of referencefor the committees, along with the schedule of matters reserved for the Board,can be found on the Company's website. The Company's underwriting activity is established, approved and monitored bythe board of Advent Underwriting, which is authorised and regulated by theFinancial Services Authority, and by the Board of Advent Re. Board Attendance during 2007 Director Relevant Number of Number attended meetings T J Ambridge 4 4B F Caudle 4 4P Stormonth Darling 4 2B W Rowbotham 4 4E St C Stobart 4 4K D Thompson 4 4Average attendance 92% Committee Membership during 2007 Group Audit Remuneration Nominations Group Committee Committee Committee Investment Committee T J Ambridge No No No YesB F Caudle No No No NoP Stormonth Darling No Yes Yes YesB W Rowbotham Yes Yes Yes YesE St C Stobart Yes Yes Yes NoK D Thompson No No No Yes Board Independence Messrs Stobart and Stormonth Darling are considered independent with regards tothe provisions set out in the Combined Code. Mr Rowbotham has been a director with the Company since 1995. The Boardcontinues to consider Mr Rowbotham as independent despite provision A.3.1. ofthe Combined Code regarding board service of more than nine years. The Boardconsiders that during this period, Mr Rowbotham has maintained his objectivityand is resolutely independent in both character and judgement. There have beenno circumstances or relationships that would require the Board to alter hisclassification as independent. Board Evaluation During the year the Board undertook a formal evaluation of the performance ofthe Board. The process involved each Director completing a self assessmentquestionnaire reviewing their own individual performance, the performance of theChairman and the performance of the Board collectively. The results of thisexercise were reported to the Board by the Senior Independent Director, MrStormonth Darling, at its meeting in October 2007. Group Audit Committee The Group Audit Committee consists of Mr Rowbotham (as Chairman) and Mr Stobart. The Committee meets at least quarterly and at least once without any executivedirector being present. The external auditors attend the Committee meetingsquarterly, at least once with no executive directors present, to discuss thenature and scope of the audit review process before it commences as well asreviewing the auditor's reports relating to accounts and internal controlsystems. The main responsibilities of the Group Audit Committee are to monitor theintegrity of financial statements, to review the effectiveness of the Company'sfinancial reporting and internal control policies, to monitor the effectivenessof the Company's internal audit function, to make recommendations to the Boardin relation to the appointment of external auditors and actuaries - includingreviewing terms and conditions and fee arrangements. The Committee also hasregard to the requirements of the FSA, Lloyd's and the Combined Code in carryingout its duties. During the year, the Group Audit Committee reviewed the Company's interim andannual report and accounts, plans for and monitoring of the internal audit workundertaken, the re-appointment of external auditors and actuaries for theCompany and its subsidiaries and the implementation of the risk managementframework for the Company and its newly established Bermudan subsidiarycompanies. The Group Audit Committee also considered the terms and conditions,fees and independence of PricewaterhouseCoopers LLP and confirms theindependence of the external auditors. Attendance at each of the meetings by Committee members is set out below: Group Audit CommitteeRelevant Director Relevant Number of meetings Number attended B W Rowbotham 5 5E St C Stobart 5 5Average attendance 100% Remuneration Committee The Remuneration Committee consisted of Mr Rowbotham (as Chairman) and MrStormonth Darling and Mr Stobart. It makes recommendations to the Board onmatters relating to the remuneration and terms of employment of the executivedirectors of the Company and on proposals for the granting of share options andother equity incentives pursuant to any share option scheme or equity incentivescheme in operation from time to time. Remuneration CommitteeRelevant Director Relevant Number of meetings Number attended P Stormonth Darling 3 1B W Rowbotham 3 3Mr Stobart 3 3Average attendance 78% Nomination Committee The Nomination Committee consisted of Mr Stormonth Darling (as Chairman), MrRowbotham and Mr Stobart. It meets as required and reviews the size, structureand composition of the Board, making recommendations to the Board on all boardappointments, including the selection of non-executive directors. The committeealso makes recommendations on re-appointment, resignation and removal ofdirectors. There were no new Directors appointed during the year. The Nominations Committee met once during 2007 to consider the renomination ofDirectors for the 2007 AGM. Attendance at the meeting by Committee members isset out below: Nominations CommitteeRelevant Director Relevant Number of Number attended meetings P Stormonth Darling 1 1B W Rowbotham 1 1E Stobart 1 1Average attendance 100 % The Committee considered the renomination of directors for the 2008 AGM on 13February 2008. In accordance with the Company's articles of association, allDirectors submit themselves for election by shareholders at the company's annualgeneral meeting following their appointment. In addition a third of theremaining Directors will also retire by rotation and therefore all Directors aresubject to re-election every three years, with the exception of Mr Rowbotham,who having served more than 9 years on the board as a Non-Executive Director,will be submitted for re-election on an annual basis. In addition to MrRowbotham, Mr Stormonth Darling will submit himself for re-election at thisyear's AGM. Group Investment Committee The Group Investment Committee consists of Mr Stormonth Darling (as Chairman),Mr Ambridge, Mr Rowbotham and Mr Thompson who have met regularly during 2007.The Committee makes recommendations to the Board regarding the investment policyand ensures the investment of Company funds is conducted within the policy. TheCommittee has delegated authority from the Board to set detailed investmentparameters. Attendance at each of the meetings by Committee members is set outbelow: Group Investment CommitteeRelevant Director Relevant Number of Number attended meetings T J Ambridge 3 2P Stormonth Darling 3 3B W Rowbotham 3 3K D Thompson 3 3Average attendance 92% Corporate Social Responsibility The Company undertakes to act fairly, honestly and with integrity in itsrelationships with its various stakeholders including employees, shareholders,capital providers, clients and the wider community. The Code of Ethics andStandards adopted by the Company sets out the values and standards of conductexpected of its employees and the Company takes into account itsresponsibilities due to, and impact on, each of these stakeholders in itspolicies and procedures. With respect to the environment, the Company has sought to reduce the impact ofits business during 2007 by implementing various energy saving and recyclinginitiatives. Employee relations The Company recognises that its success lies with its employees and as such aimsto meet or exceed best practice in terms of employee relations. The Company hasan established equal opportunities policy and, during 2007, had an averageabsence record of 1.6 days per employee (2006: 1.7 days). Ongoing professionaldevelopment is strongly encouraged with an average of 28 hours of trainingundertaken per employee (not including additional study leave for examinations)during 2007 (2006: 25) and around 43% of the workforce holding at least oneprofessional qualification. No employees left the Company during 2007, compared to the turnover figure of23% in 2006. Directors' Remuneration Report All members of the Remuneration Committee are independent Non-ExecutiveDirectors and they do not have any personal financial interest in the Companyother than their shareholdings in the Company disclosed in the table above. Remuneration Policy The objective of the policy is to ensure that all members of the executivemanagement of the Company are provided with appropriate incentives to encourageenhanced performance and are, in a fair and responsible manner, rewarded fortheir individual contributions to the success of the Company. The Committee willhave regard to conditions of service and remuneration levels of competitorcompanies to ensure that the Company is well placed to attract and retain highcalibre management, but not so as to cause remuneration to rise without acorresponding improvement in performance. There are four main elements to the remuneration package for executive directorsand senior management: • Basic annual salary and benefits • Annual Syndicate performance related bonus • Share Options • Pension Arrangements Basic Salary and benefits The Remuneration Committee reviews executive directors and senior managementsalaries annually. The Committee utilises reports provided by Watson Wyatt asindependent consultants, as well as other publicly available reports in order toensure that remuneration levels are consistent with comparable companies, whilstalso taking into account the Company's performance. Directors also receivebenefits in kind such as private health care and permanent heath insurance. Annual Syndicate performance related bonus The Company established a Profit Related Pay Scheme in 2005 (the "PRP Scheme")under which bonuses are paid to staff based upon the annually accounted profitof Syndicate 780. Payments are only made under the PRP Scheme when the annual accounting profit ofthe Syndicate is equal to or greater than 10% of syndicate capacity on acalendar year basis. Payments are then calculated as a percentage of basesalary - the percentage increasing as the profits increase as a percentage ofcapacity. Directors receive a bonus of 10% of base salary should the Syndicatemake a 10% profit, with the bonus increasing in increments of 4.0% of basesalary per additional 1% profit made above 10%. The payments are made in twoinstalments, the first instalment of 60% will be made three months after therelevant year end, with the remaining 40% being paid fifteen months after therelevant year end. The PRP Scheme is not subject to any deficit clause orclawback provisions in the event the Syndicate makes a loss in any year. The Remuneration Committee have agreed that the bonus payments for 2007 shall bepayable in full by 31 March 2008. Bonus payments to be made in respect of the 2007 year are set out in the tablebelow. Directors' Remuneration 2007 2006 Salary/ Fees Bonus Pension Other Total Total Benefits £ £ £ £ £ £ChairmanB F Caudle 325,000 106,074 - 3,215 434,289 557,523 Executive DirectorsT J Ambridge* 325,000 212,500 9,996 157,922 705,418 665,218C E Murphy** - - - - - 327,880(Resigned 31.05.06)K D Thompson 318,750 104,034 47,192 1,966 471,942 568,004 Non-Executive DirectorsB W Rowbotham 58,750 - - - 58,750 50,000R M Salter - - - - - 8,525(Resigned 02.05.06)E St C Stobart 33,750 - - - 33,750 24,519P Stormonth Darling 28,750 - - - 28,750 25,000 Total 1,090,000 422,608 57,188 163,103 1,732,899 2,226,669 * The bonus payable is contractual as Mr Ambridge is not a member of the PRP Scheme. ** The amount disclosed in salary/fees for Mr Murphy includes a £229,500 payment made for loss of office The Remuneration Committee reviewed the PRP Scheme during 2007 and has agreed anamended bonus scheme for implementation for the 2008 year. The principles of the revised scheme are consistent with that of the 2005 PRPScheme, however the new scheme now aligns bonus payments to achieving corporateobjectives by reference to the reported return on equity of the Company ratherthan profit as a percentage of syndicate capacity. In addition, an element ofthe bonus limited to 20% of salary is derived from the achievement of personalobjectives set for each individual. The remaining bonus element is only payablewhen the Company's return on equity exceeds 12% at which the bonus award of 10%of salary increases to a maximum of 80% on salary once a return on equity of 25%or more achieved. The maximum bonus payable under the scheme is 100% of salary,whereas there was no such cap provided in the previous scheme. Share Option Schemes The Advent Share Option Plans are a key element of the Advent Group's retentionand reward policy and are designed to align the interests of employees andshareholders in addition to incentivising staff. The Advent Share OptionSchemes are open to all employees and executive directors. The Company established two share options plan 2005: the Advent Capital(Holdings) PLC Approved Share Option Plan ('AS2005') and the Advent Capital(Holdings) PLC Unapproved Share Option Plan ('UAS2005'), collectively referredto as the "Advent Share Option Plans". The initial tranche of options granted under the Schemes at the time of theCompany's flotation on AIM were not subject to any performance conditions andwere granted at the placement price of 35p per ordinary 5p share. At the Extraordinary General Meeting held on 6 January 2006, shareholdersapproved an amendment to the Unapproved Share Option Scheme to permit theRemuneration Committee to determine the exercise price of options to be grantedpursuant to the scheme at their discretion at below market value (as defined inthe scheme) only for the purposes of grant of up to 5,850,000 options at anexercise price of 20p per share ('UAS2006'), which was the placing price of theprivate placement undertaken at the same time. There were no share options granted during 2007. No share options available forexercise during 2007 were exercised by directors. The options held over Ordinary 5p shares in the company as at 31 December 2007by executive directors serving at the year end are shown below: Options Held Director Scheme Shares under Exercise Dates Options Potential option on 1 price per exercisable Profit(£) on January 2007 share 31 December and 31 2007 December 2007 T J Ambridge - - - - -B F Caudle AS2005 85,714 35p 03/06/08-03/ Nil 06/15 UAS2005 439,286 35p 03/06/06-03/ Nil 06/15 UAS2006 1,500,000 20p 02/05/09 - 02 67,500 /05/16 Total 2,025,000 67,500 K D Thompson AS2005 85,714 35p 03/06/08-03/ Nil 06/15 UAS2005 589,286 35p 03/06/06-03/ Nil 06/15 UAS2006 1,350,000 20p 02/05/09 - 02 60,750 /05/16 Total 2,025,000 60,750 The Remuneration Committee has reviewed the incentive schemes operated by theCompany and is proposing to implement a new Long Term Incentive Plan (LTIP),Share Option and Share Saving Scheme. The Committee obtained independentprofessional advice in the design of the revised incentive plans from HalliwellConsulting to ensure that they were in line with those operated by other AIM andLloyd's market entities as well as being within the spirit of ABI Guidelines andthe requirements of the Combined Code. The proposal to implement the revised incentive schemes, will be included in theresolutions for the AGM and details of each of the schemes will be contained inthe AGM circular. Pensions The Company does not operate an occupational pension scheme, but instead makescontributions to employees' and directors' personal pension schemes on anon-contributory basis. Directors also receive death in service benefit of eight times basic salary. Service Contracts Mr Caudle's contract was for an initial five-year period from 16 November 2000and thereafter is terminable by either side on 12 months notice. Mr Thompson'scontract was for an initial three-year period from 22 October 1999 andthereafter is terminable by either side on 12 months notice. Mr Ambridge'scontract is for a fixed two-year period from 1 June 2006 until 31 May 2008,thereafter the contract may be extended on terms and for a period to be agreedby both parties. The Remuneration Committee believe that these notice periods provide anappropriate balance and adequately protect the Company, having regard to theprevailing market for recruiting suitable replacements. Non-Executive directors The Executive Directors review Non-Executive Director's remuneration annually toensure that fees are in line with comparable companies. All Non-ExecutiveDirectors-receive an annual fee in respect of their board and boardcommittee duties. The Non-Executive Directors do not receive any other benefit. The terms and conditions of appointment of Non-Executive Directors are availablefor inspection upon request at the Company's registered office. Internal Control and Risk Management Overview The Board of Directors is responsible for the oversight of the Company's systemsof internal control, for reviewing their effectiveness at least annually and forreporting on the effectiveness of controls in the Company's Annual Report andAccounts. The Audit Committee has oversight over the internal and externalauditors and actuaries. Executive Management is responsible for theimplementation and satisfactory maintenance of systems of internal controls overfinancial reporting and for compliance with laws and regulations. Every employee is responsible for internal control and is informed of their rolethrough detailed job descriptions, policies and procedures manuals andcommunications from Executive Management and the Board of Directors. The Company's systems of internal control consist of the five interrelatedcomponents: Control Environment The control environment sets the tone of the business influencing the controlconsciousness of its Directors and employees, sometimes referred to as the "toneat the top". It provides structure and discipline for the other four components,incorporating factors such as integrity, ethical values, management's philosophyand operating style; assignment of authority and responsibility; employeecompetence; organisational structure; and the attention and direction providedby the Board of Directors. The control environment is communicated to employees through the following keypolicies approved by the Board: • Corporate objectives and risk appetite• Code of Ethics and Conduct• Whistle Blower• Insider Trading - Restrictions on Share Dealing by Directors and Employees As a small organisation, the Company's culture is hands-on with extensiveinteraction between Executive Management and employees and one which takes pridein maintaining strong underwriting disciplines throughout the insurance cyclewhile acknowledging the potential volatility in short term results arising fromcatastrophe events. Risk Assessment The Company's risk appetite is recommended by the Executive Management to theBoard of Directors for their approval and maintains that the catastropheexposures for Syndicate 780 to any one of the Lloyd's RDS is within the Lloyd'sfranchise guidelines of a gross loss of 75% of capacity and a net loss of 20% ofcapacity. The objective is to allow for a margin of safety from the Lloyd'sguidelines to allow for potential variations in actual catastrophe eventscompared with the RDS. For 2008, Advent Re's exposure to any one major catastrophe event has been setat US$45 million for a US Wind event and at US$60 million for all events. The Company faces a variety of risks from both internal and external sourcesthat require identification, assessment and management. Risk management is theprocess that enables a business to: • Identify and understand the risks that it faces in the pursuit of its business objectives; • Assess and prioritise the risks identified and the means of mitigating them; • Where possible and commercially feasible, reduce the probability and impact of those risks; • Regularly review, monitor and report on those risks in order to take informed actions; and • Ensure that any new risks, or changes to existing risks, are captured. As the environment in which the Company is operating is constantly changing, therisk assessment process needs to be dynamic and updated on an ongoing basis. The key risks, as assessed by the Company, are set out below: • Insurance risk: o Prices - The insurance and reinsurance industry is very competitive and prices are cyclical in nature. The risk is that insurance prices will fluctuate significantly and be below underlying costs for many years. o Cost of revenue - Insurance costs are not fixed and known at the time a policy is issued. The risk is that these costs can significantly exceed premiums received. o Underwriting - If underwriters fail to assess accurately the risks underwritten or if events or circumstances cause their risk assessment to be incorrect, the Company may not charge appropriate premiums and this could have a material adverse effect on the results of its operations. o Catastrophe exposure - The Company is subject to catastrophe losses like earthquakes, hurricanes and other natural perils and terrorism. As the size, severity and frequency of these losses are unpredictable, the risk is that these losses could adversely affect the company's results. o Claims reserves - The risk that the provision for claims, which is an estimate of the ultimate cost of claims incurred, may be found to be deficient. o Reinsurance recoverable - Reinsurance is a longer term credit risk with some amounts often received over a period of years. The risk is that losses will not be collectible from the Company's reinsurers. • Financial risk: o Credit risk is the risk that a counterparty will be unable to pay amounts in full when due. The Company is exposed to credit risk through its investment portfolio, reinsurance recoverable and amounts due from intermediaries and policyholders. o Liquidity - is the risk that the Company may not have cash available to pay obligations when due at a reasonable cost, particularly for major catastrophe events where it has to post US situs funds on gross incurred claims or where it has to pay gross claims before collecting the related reinsurance. • Foreign exchange: o As the Company's operations and financing activities are conducted in a number of currencies, there is a risk that movements in exchange rates could adversely affect the Company's results. • Capital management: o Regulation - the risk that Advent is unable to obtain approval from Lloyd's to access Syndicate profits and/or Funds at Lloyd's. o Capital adequacy -the risk that insurance regulators (FSA) or Lloyd's could set capital requirements in excess of the Company's resources or at levels where the Company cannot make an adequate return on capital deployed. o Ratings - the risk that the Syndicate may face a downgrade in its claims paying financial strength ratings. As financial stability is very important to its customers, this may adversely affect its ability to attract and write business. o Financial strength - if the company requires additional capital or liquidity but cannot obtain it on reasonable terms, its operations and financial position could be adversely impacted. • Other Risks: o Taxation - the risk that deferred income tax assets arising from operating losses may not be realised as they are dependent on the future profitability of the Company. o Goodwill and intangible assets - the risk that the value attributed to these assets may be reduced as it is dependent on the profitability of the operations which gave rise to the goodwill or intangible asset o Key Staff - the risk that the Company's operations, as a small company, may be adversely affected by the unexpected loss of key management and key underwriter turnover. Further information in respect of the key risks is included in the notes tofinancial statements. Key risks are supported by risk and control maps and company policies andprocedures. During 2007, this risk and control structure was extended to includethe operations of Advent Re. Ownership of key risks and controls is clearly defined. Assessments areundertaken upon a consistent and regular basis to ensure that risks remainrelevant and up-to-date. When any residual risk i.e. a risk after the application of existing controls,falls outside the Company's risk appetite, action plans are agreed, implementedand monitored. Risk mitigation actions have clearly defined owners andimplementation timescales. Control Activities Control activities are the policies and procedures that are set by the ExecutiveManagement to manage risk and support the delivery of the Company's objectives. The Company maintains and updates policies and procedures addressing all keyareas of the business. Information and Communication Appropriate information must be identified, captured and communicated in a formand timeframe that enables directors and employees to carry out theirresponsibilities. The Company has an established management information systemfor the production of operational, financial and compliance reports which allowthe Executive Management and the Board to run and control the business. The Company has established corporate objectives and risk appetite. The keyperformance data required for management and control purposes has beenidentified as return on shareholders' equity, combined ratio, adequacy ofreserves, exposure to catastrophe losses on a gross and net basis andperformance against the approved business plan. Management reports are producedmonthly for the Executive Group and reported to the Board quarterly. Decisionmaking is made at the appropriate level, within pre-agreed parameters, andcommunicated throughout the Company as required. The Company maintains pro-active channels of communication with all keystakeholders including existing and prospective clients, staff, brokers,reinsurers, shareholders, capital providers and regulators. Monitoring Internal control systems need to be monitored to assess the quality of thesystem over time. The Company achieves this through a combination of day-to-dayoperational monitoring conducted by management, such as the review of exceptionreports, together with a comprehensive risk based internal audit programme. The audit programme is risk focussed with the majority of the activity centredupon those areas which are considered to generate the largest risks namelyunderwriting, reinsurance and claims, together with the target of auditing allother key areas of the Company's operations at least once every two years. TheAudit Committee meets at least quarterly and there are no fundamental actionpoints outstanding or overdue. The Company believes it has implemented an effective system of internal control. Statement of Directors' Responsibilities Company law requires the Directors to prepare Accounts for each financial yearwhich give a true and fair view of the state of affairs of the Company and theGroup and of the profit or loss of the Group for that period. In preparingthose Accounts the Directors are required to: • select suitable Accounting Policies and then apply them consistently, with the exception of changes arising on the adoption of new accounting standards in the year; • make judgements and estimates that are reasonable and prudent; • state whether applicable Accounting Standards have been followed, subject to any material departures disclosed and explained in the Accounts; • prepare the Accounts on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors confirm that they have complied with the above requirements inpreparing the financial statements. The Directors are responsible for maintaining proper accounting records whichdisclose with reasonable accuracy at any time the financial position of theCompany and the Group and to enable them to ensure that the Accounts comply withthe Companies Act 2006. They are also responsible for safeguarding the assets ofthe Company and the Group and hence for taking reasonable steps for theprevention and detection of fraud and other irregularities. Statement of disclosure of information to auditors Each of the persons who is a director at the date of this report confirms that: 1) So far as each of them is aware, there is no information relevant to the audit of the Company's consolidated financial statements for the year ended 31 December 2007 of which the auditors are unaware; and 2) The director has taken all steps that he ought to have taken in his duty as a director in order to make himself aware of any relevant audit information and to establish that the Company's auditors are aware of that information. Auditors A resolution to re-appoint PricewaterhouseCoopers LLP will be proposed at theforthcoming Annual General Meeting on 9 April 2008. By Order of the Board G PerdoniSecretary CONSOLIDATED INCOME STATEMENTYear ended 31 December 2007 Note 2007 2006 £'000 £'000IncomeGross premiums earned 3 113,400 106,022Reinsurance to close premiums 3 6,698 701Reinsurance premiums ceded 3 (24,114) (25,029) Net premiums earned 3 95,984 81,694Investment result 4 13,141 12,681Other operating income 483 1,054 Total Income 109,608 95,429 ExpensesClaims incurred 3 (47,819) (51,754)Reinsurance recoveries 3 (614) 8,681Acquisition costs 2 (18,921) (17,666)Underwriting expenses 2 (8,655) (6,882)Profit on exchange 1 868 4,041Corporate costs 2 (4,748) (5,436) Total Expenses (79,889) (69,016) Operating Result 29,719 26,413Interest expense (4,558) (3,560) Profit before tax 25,161 22,853Tax 6 (5,969) (6,842) Profit for the yearattributable to ordinaryshareholders 19,192 16,011 Earnings per ordinary share- Basic and diluted 5 4.7p 4.3p Dividends per ordinary share - - The notes form an integral part of these financial statements. CONSOLIDATED BALANCE SHEETAt 31 December 2007 Note 2007 2006 £'000 £'000AssetsCash and cash equivalents 4 26,978 141,654Financial investments at fair value 4 239,826 101,731Other receivables 4 4,345 9,520Insurance and reinsurance assets - Reinsurers' share of outstanding claims 3 18,176 33,317 - Reinsurers' share of unearned premiums 3 1,058 4,457- Debtors arising from insurance and reinsurance operations 48,060 45,321Deferred tax asset 6 15,665 21,654Property and equipment 651 562Intangible assets 7 7,210 8,062 Total assets 361,969 366,278 Shareholders' EquityOrdinary share capital 5 20,329 20,329Share premium account 60,662 60,662Capital redemption reserve 21,065 21,065Other reserves (2,666) (2,886)Retained earnings (deficit) 9,008 (10,184) Total shareholders' equity 108,398 88,986 LiabilitiesInsurance and reinsurance liabilities - Outstanding claims 3 163,764 193,101 - Unearned premiums 3 31,136 24,322 - Creditors arising out of insurance andreinsurance operations 6,442 6,798Trade and other payables 8 4,882 5,789Long term debt 5 47,347 47,282 Total liabilities 253,571 277,292 Total shareholders' equity and liabilities 361,969 366,278 The notes form an integral part of these financial statements. The financial statements were approved by the Board of Directors on 21 February2008 and signed on its behalf by: Brian F Caudle Trevor J AmbridgeChairman Chief Financial Officer CONSOLIDATED STATEMENT OF CHANGES IN EQUITYYear ended 31 December 2007 Capital Share Share re-demption Other Retained capital premium reserve reserves earnings Total £'000 £'000 £'000 £'000 £'000 £'000 Balance, 1 January 2006 10,981 31,759 21,065 (3,029) (26,195) 34,581 Profit for the year - - - - 16,011 16,011 Share based payments - - - 143 - 143 Proceeds from issue ofshares (Note 5) 9,348 28,903 - - - 38,251 Balance, 31 December 20,329 60,662 21,065 (2,886) (10,184) 88,9862006 Profit for the year - - - - 19,192 19,192 Share based payments - - - 220 - 220 Balance, 31 December 20,329 60,662 21,065 (2,666) 9,008 108,3982007 Share premium account is the excess of proceeds from issue of shares over thepar value of the ordinary shares. Capital redemption reserve was transferred from share capital on the reductionin par value of ordinary shares from 25p to 5p per share in June 2005. Other reserves include the amortisation of share based payments, exchangedifferences on the translation of Advent Re (if applicable) and grandfatheredmerger reserves. Profit for the year is the total recognised income for the year. The notes form an integral part of these financial statements. CONSOLIDATED CASH FLOW STATEMENTYear ended 31 December 2007 Note 2007 2006 £'000 £'000 Cash flows from operating activities 12 (117,799) (28,847)Interest paid (4,563) (3,427)Income tax 133 150 Net cash used in operating activities (122,229) (32,124) Cash flows from investing activitiesInterest received 7,926 4,206Purchase of property and equipment (373) (421)Purchase of syndicate capacity - (1,499) Net cash from investing activities 7,553 2,286 Cash flows from financing activitiesIssue of ordinary share capital - 39,582Share issue expenses - (1,331)Issue of loan notes - 25,277Loan note issue expenses - (792) Net cash from financing activities - 62,736 Net increase (decrease) in cash and cash equivalents (114,676) 32,898Cash and cash equivalents at beginning of year 141,654 108,756 Cash and cash equivalents at end of year 4 26,978 141,654 The notes form an integral part of these financial statements. BASIS OF PRESENTATION These financial statements have been prepared in accordance with InternationalFinancial Reporting Standards (IFRS) and IFRIC interpretations endorsed by theEuropean Union (EU) and with those parts of the Companies Act 1985 applicable tocompanies reporting under IFRS, using the historic cost convention with therevaluation of financial assets and financial liabilities at fair value throughthe consolidated income statement. The Company adopted IFRS in the preparation of its interim consolidatedfinancial statements for the three months ended 31 March 2007, with effectiveapplication from 1 January 2006. Accordingly, all comparative information hasbeen restated to an IFRS basis. As required upon adoption of IFRS, Note 15 setsout the reconciliation of the balance sheets at 1 January 2006 (the opening IFRSbalance sheet) and at 31 December 2006 (the last UK GAAP balance sheet) and theprofit for the year ended 31 December 2006 between IFRS and UK GAAP, togetherwith explanations for changes made. The consolidated financial statements include the assets, liabilities andresults of the Parent Company and its subsidiaries. The Company participates ininsurance business as an underwriting member at Lloyd's. The Company includesits share of the assets and liabilities arising as a result of underwritingactivities in these financial statements. These assets and liabilities are heldunder various Lloyd's trust deeds and are shown separately in Note 9 to theAccounts. FIRST TIME ADOPTION OF IFRS The application of IFRS has changed the format and presentation of the primaryfinancial statements resulting in some terminology changes. The profit and lossaccount which was previously classified between a technical account and anon-technical account under UK GAAP has been renamed as the Income Statementunder IFRS with no further reference to the technical or non-technical account. The adoption of IFRS has changed the accounting policies for financialinvestments, cash and cash equivalents, intangible assets and goodwill. Theimpact of these changes on the income statement and balance sheet is set out inNote 15. ACCOUNTING POLICIES Use of estimates and critical judgements The preparation of the financial statements requires the use of estimates andassumptions that affect the reported amounts of assets and liabilities and thedisclosure of contingent liabilities. Although these estimates are based onmanagement's best knowledge of current information and events, actual resultsmay ultimately differ from these estimates, perhaps significantly. The mostsignificant estimate involves the valuation of outstanding claims and, inparticular, the provision for claims incurred but not reported, as set out inNote 3. The significant accounting policies which the Company has adopted areset out below. Financial investments The Company currently holds short term government or government guaranteedsecurities which have been classified as "fair value through income onacquisition" due to the short term nature of the investments acquired.Purchases and sales of investments are recognised on the trade date, being thedate at which a commitment to buy or sell the asset has been made. Investmentsare initially recognised at fair value, and are subsequently re-measured at fairvalue based upon quoted bid prices. Changes to the fair value are included inthe income statement for the period in which they arise. If the Company decides to purchase long term fixed income or equity securities,management expects that these securities will be classified as "available forsale" with any changes in fair value being included as a separate component ofshareholders' equity as "Unrealised gain or loss on investments, net of tax"during the period in which they arise. Foreign currency translation The Company's functional currency is sterling. Foreign currency transactions aretranslated into sterling using the exchange rate at the date of thetransactions. Monetary assets and liabilities in foreign currencies aretranslated into sterling at the closing rates of exchange at the balance sheetdate. Non-monetary assets and liabilities, including unearned premiums anddeferred acquisition costs, are translated into sterling at historic rates ofexchange. Resulting foreign exchange gains and losses are recognised in theincome statement. Advent Re is a self-sustaining foreign subsidiary whose functional currency isthe US dollar. Assets and liabilities are translated at the period end exchangerate. The income statement is translated at the average exchange rate for theperiod. Exchange differences arising from the translation of the net investmentin Advent Re, against which the Company's long term debt has been formallydesignated as an effective hedge, are recorded as a separate component ofshareholders' equity in the "Currency Translation Account". Cash and cash equivalents Cash and cash equivalents consist of cash at bank, short term bank deposits andany highly liquid short term investments with original maturity dates of threemonths or less. Purchased syndicate capacity and goodwill Purchased capacity has both definite and indefinite life components. The cost of purchasing the Company's participation in Syndicate 780 is recordedat cost. Syndicate capacity is considered to have an indefinite life and is notsubject to annual amortisation. The additional consideration of £1.2 million payable to third party capitalproviders participating on the 2007 year of account is considered to be adefinite life asset which is being amortised to expense over this year ofaccount. Goodwill, representing the excess of the cost of an acquisition over the fairvalue of net identifiable assets acquired at the date of acquisition, isincluded in these accounts on the basis of deemed cost which is the carryingvalue under UK GAAP at the date of transition to IFRS, less any subsequentimpairment losses. The carrying values of purchased capacity and goodwill are reviewed annually forany impairment in value with reference to the future cash flows to be earnedfrom Syndicate 780 for purchased capacity and from the Marine and Energyaccounts for goodwill, with any impairment in value charged to the incomestatement in the period in which it is identified. The indefinite lifepurchased capacity and goodwill have been assessed as being recoverable fromshort term future profits which have therefore not been discounted. Long term debt Long term debt is initially recognised at fair value, net of transaction costsincurred. Subsequently, long term debt is stated at amortised cost using theeffective interest rate method. Any difference between the amortised cost andthe redemption value is recognised in the income statement over the period ofthe debt. Insurance and reinsurance business The results for insurance and reinsurance business written are determined on anannual basis whereby the incurred cost of claims, commission and relatedexpenses are charged against net earned premium. (i) Gross Premiums All insurance and reinsurance contracts are accounted for as insurance underIFRS 4. Premiums written relate to business incepted during the year, togetherwith any differences between booked premiums for prior years and thosepreviously accrued, and include estimates of premiums due but not yet receivableor notified to the Company, less an allowance for cancellations. Gross premiumis earned over the period of the contract on a 365ths basis when the incidenceof risk is similar throughout the contract period. Where the incidence of riskvaries through the policy period, gross premium is earned in proportion to therisk profile. Unearned premiums represent the proportion of premiums written that relate tothe unexpired terms of policies in force at the balance sheet date. All premiums are stated gross of acquisition costs, which represent commissionand other related expenses, which are expensed over the period in which therelated premiums are earned. (ii) Reinsurance premiums ceded comprise the cost of reinsurance arrangementsplaced and are generally recognised over the period in which related grosswritten premiums are earned. "Losses occurring during" policies are chargedover the period for which coverage is provided. (iii) Claims incurred comprise claims and related expenses paid in the yearand changes in the provisions for outstanding claims, including provisions forclaims incurred but not reported and related expenses, together with any otheradjustments to claims from previous years. Where applicable, deductions are madefor salvage and other recoveries. Provision is also made, where necessary, for any deficiencies arising whenunearned premiums, net of associated acquisition costs, are insufficient to meetexpected claims and expenses after taking into account future investment returnon the investments supporting the unearned premiums reserve and unexpired risksprovision. The expected claims are calculated based on information available atthe balance sheet date. Unexpired risk surpluses and deficits are offset wherebusiness classes are managed together and a provision is made if an aggregatedeficit arises. (iv) Reinsurance recoveries represent the reinsurers' share of the claimsincurred in the period, adjusted for any provisions for bad debt. (v) Outstanding claims represent the undiscounted ultimate cost of settlingall claims (including direct and indirect claims settlement costs) arising fromevents which have occurred up to the balance sheet date, including provision forclaims incurred but not yet reported, less any amounts paid in respect of thoseclaims. The Company takes all reasonable steps to ensure that it has appropriateinformation regarding its claims exposures. However, given the uncertainty inestablishing claims provisions, it is likely that the final outcome will proveto be different from the original liability established. Receivables Debtors and creditors, valued at cost, include the totals of the Company's shareof the syndicates' outstanding debit and credit transactions as processed byXChanging Ins-sure Services Ltd. Since there is no legal right of offset, noaccount has been taken of any offsets which may be applicable in calculating thenet amounts due between the syndicates and their counterparty insureds,reinsurers or intermediaries as appropriate. Property and equipment Depreciation is provided on all property and equipment in order to write downtheir cost or valuation to their estimated residual value by equal instalmentsover their estimated useful economic lives, which are considered to be: Furniture, fittings and equipment 2 to 5 yearsComputer equipment 3 years Deferred tax Deferred tax is provided in full, using the liability method, on temporarydifferences arising between the tax bases of assets and liabilities and theircarrying amounts in the consolidated financial statements. However, if thedeferred tax arises from initial recognition of an asset or liability in atransaction other than a business combination that at the time of thetransaction affects neither accounting nor taxable profit or loss, it is notaccounted for. Deferred tax is determined using tax rates (and laws) that havebeen enacted or substantively enacted by the balance sheet date and are expectedto apply when the related deferred tax asset is realised or the deferred taxliability is settled. Deferred tax assets are recognised to the extent that it is probable that futuretaxable profit will be available against which the temporary differences can beutilised. Deferred tax is provided on temporary differences arising on investments insubsidiaries and associates, except where the Group controls the timing of thereversal of the temporary difference and it is probable that the temporarydifference will not reverse in the foreseeable future. Pensions The Company pays contributions to the individual money purchase schemes ofdirectors and employees. Contributions are charged to the income statement asincurred. Share based payments The Company operates a number of share option schemes. These options areaccounted using a fair value method where the cost of providing the option isbased upon the fair value of the option at the date of grant. The fair value iscalculated using an option pricing model, with the corresponding expense beingcharged to the income statement over the vesting period. The accrued liabilityis recognised in other reserves as a component of shareholders' equity. Uponexercise, the par value is reflected within share capital with the excessproceeds received, net of any transaction costs, over the par value reflected aspart of share premium. Early adoption of standards, and standards not yet adopted The Company has reviewed the requirements of IFRS 8 - Operating Segments and hasconcluded that early adoption of this standard offers users of these financialstatements a better understanding of the way in which the Company manages itsbusiness. Notwithstanding the standard's mandatory implementation date of 1January 2009, the Company has chosen to early adopt the requirements of thisstandard in these financial statements. There are no other relevant standards or interpretations of standards which havebeen issued but which have not yet been adopted by the Company. This information is provided by RNS The company news service from the London Stock Exchange MORE TO FOLLOW

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