Final Results - Part 1

23rd Feb 2007 07:01

Advent Capital (Holdings) PLC23 February 2007 PART 1 OF 2 Advent Capital (Holdings) PLC ("Advent" or the "Company") Advent, the specialist Lloyd's insurer, today reports its 2006 final results. • Key highlights • Profit before tax of £22.2m • Return on equity of 24.0% • Successful buyout of Syndicate 780's third party capacity for 2008 onwards • 83.6% of Syndicate 780's 2007 capacity • Advent Re licensed and trading for 2007 with capital of US$37.5m • Robust trading conditions for 1 January 2007 renewals • Renewal of reinsurance programme brought forward and better coverage purchased • Financial summary 2006 2005 Profit (loss) before tax £22.2m (£74.8m) Profit (loss) after tax £15.4m (£52.5m) Net premiums earned £81.7m £65.1m Combined ratio 74% (1) 220% Earnings (loss) per share 4.2p (30.6p) Return on equity 24.0% (69.1%) Net assets per share 21.7p 15.7p (2) Net tangible assets per share 19.9p 13.3p (2) (1) Combined ratio of 83% excluding foreign exchange gain of £7.0 million (2) Net assets per share of 17.3p and net tangible assets per share of 15.8p post January 2006 capital raising • Current trading outlook • Rates are holding at excellent levels for peak catastrophe territories • Some downward pressure on rates for non peak catastrophe territories with terms and conditions holding • Syndicate 780's gross and net exposures on catastrophe exposed accounts reduced • The market continues to display a reasonably disciplined approach to underwriting although we are seeing increased competition • Current market conditions are in line with management's expectations • Brian Caudle, Chairman of Advent Capital (Holdings) PLC commented: "I am delighted that the Company has returned to strong profitability in 2006,our first full year of trading since we listed on AIM. Having used theadditional capital raised after the 2005 hurricane season to increase our shareof Syndicate 780's capacity from 54% in 2005 to 80% in 2006, we have increasedour share of the payback from the 2005 hurricanes, for the benefit of ourshareholders. Advent has further established a new trading platform in Bermuda,Advent Re, to complement our Lloyd's business and to respond to changing marketdynamics in our business. We look forward to developing further our longstandingreinsurance capability through this strategically important platform." Advent Capital HoldingsKeith Thompson 020 7743 8200Chief Operating Officer Trevor Ambridge 020 7743 8200Chief Financial Officer Neil Ewing 020 7743 8250Investor Relations Pelham Public RelationsCharles Vivian 020 7743 6672Gavin Davis 020 7743 6677 CHAIRMAN'S STATEMENT Advent returned to strong profitability in 2006, benefiting from a benign yearfor catastrophes, with an after tax profit of £15.4 million and producing a goodreturn to shareholders with a return on equity of 24.0%. Net assets per sharehave increased by 25% to 21.7p at 31 December 2006. All lines of business haveproduced underwriting profits in 2006, with our Non Marine Reinsurance portfolioproducing a strong underwriting return before expenses of £28.8 million and ourgrowing book of Property Insurance also making a significant contribution withan underwriting return before expenses of £7.0 million. Following the losses suffered on the 2005 hurricanes, the Board of Directorsdetermined that it was not appropriate to pay a dividend in 2006. Although 2006has produced a substantial profit, the Board believes it is premature tocommence paying a dividend at this time. If we accomplish our shareholderreturn objectives in 2007, it would be our intention to reinstitute a dividendat the 2008 AGM. 2006 was a year of considerable progress for the Company in terms of achievingour objectives. In January 2006, the Company completed a capital raising of £30million of equity and £15 million of debt to take advantage of the excellentmarket conditions following the highly active hurricane season of 2005. We usedthis capital to increase our participation on Syndicate 780 to 80% of capacityfor 2006 and to help meet losses arising from the 2005 hurricanes. I am pleasedthat Syndicate 780 has performed well for 2006 and that the faith expressed byshareholders has been justified. During 2006, we also bought out the remaining Names on Syndicate 780,representing 20% of the Syndicate's capacity. We recognise the immense supportthat our third party capital providers have given us since the Syndicatecommenced trading in 1974 and we are pleased that many of those Names took upour limited tenancy offer for 2007. For 2008 onwards, we will own all of thecapacity for Syndicate 780 giving us greater operational flexibility to adapt tochanging market conditions and to choose the best location to write ourreinsurance business. In December 2006, we raised a further £9.6 million of equity and $20 million ofdebt to finance our new underwriting platform in Bermuda, 'Advent Re'. This newventure has now been successfully established and began operating in January2007, initially specialising in providing retrocessional cover for clients knownto Advent. Over time, we expect this part of the business to evolve into a morebroadly spread reinsurance carrier, providing both conventional treaty andretrocessional cover. I have stepped down from my operational role as Directorof Underwriting for Advent Underwriting Limited, the company that managesSyndicate 780, in order to focus my attention on the development of Advent Re,working closely with Duncan Lummis, Advent Re's Chief Underwriting Officer.Lloyd Tunnicliffe has been appointed Chief Underwriting Officer of AdventUnderwriting Limited and is responsible for the execution of the Syndicate'sbusiness plan and further development of its business. As Chairman of theCompany, I retain oversight responsibility for both the Lloyd's and Bermudaoperations. Following our experience with the 2005 hurricanes, we have changed Syndicate780's business mix to expand our book of short tail direct insurance risk whilereducing our peak zone catastrophe exposures in 2006 and continuing into 2007.This changing mix of business resulted in our Enhanced Capital Requirement (ECR)remaining unchanged at 67% of syndicate capacity for 2007. We believe that thecontinuing progress we are making to reduce the potential volatility ofSyndicate 780's results will lead to a lower ECR for 2008. 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 requirement of a gross loss of 75% of capacity and a net lossof 20% of capacity. Our objective is to operate with a margin of safety fromthe Lloyd's requirements thereby allowing for any potential variations in actualcatastrophe events compared with the RDS. For Syndicate 780, this means theability to absorb most, if not all, of the pre tax cost of one major catastropheloss within Syndicate 780's budgeted catastrophe margin (assuming that thismargin has not been eroded by smaller, attritional catastrophe losses) which,for the 2007 year of account, is approximately 16% of capacity. It should alsogive us the ability to absorb a second major catastrophe loss from the Lloyd'sRDS within Syndicate 780's budgeted profit margin which, for the 2007 year ofaccount, is approximately 20% of capacity. Whilst 2006 has been a good year for Advent, the business of insurance is stillone of bearing risk for return. Insurance values are going up, concentrationsof those values in catastrophe exposed areas is increasing and new forms of riskare emerging. Our business model has been revised to meet these challenges andwe believe there will be significantly less volatility in the overall portfoliowhen a major catastrophe occurs. However, I remind you that we are in thebusiness of taking risk and when major catastrophes occur, our results will beaffected. Current trading conditions During the latter part of 2006 and following the benign hurricane season, we sawmany companies seeking to raise capital to take advantage of the attractivemarket conditions, particularly in catastrophe exposed property reinsurancebusiness. Post the 2005 hurricanes, this has included stand-alone start-ups,with capital of $7.6 billion((1)), Lloyd's entities starting up Bermudaoperations or re-domiciling to Bermuda with capital of $1.1 billion((1)) andnumerous hedge fund vehicles and side cars with capital in excess of $7 billion((1)). There were many more ventures which we understand failed to get thecapital support they were looking for. As a result, there was increasedcompetition for business and, in particular, for non US catastrophe exposedbusiness, as reinsurers sought to diversify their portfolios, partially inresponse to rating agency pressures, and as direct writers fought for anincreased market share of retail business. ((1))Dowling & Partners (IBNR Weekly #3) 22 January 2007 Our underwriting franchise has been built over many years and, whilst we are byno means immune to competition, we believe we are in a much stronger positionthan many as we have strong, long-lasting historical client and brokerrelationships. In the last three years, well over 80% of our total 'book' hasrenewed with us year on year, and, for our core treaty book, over 90% hasrenewed. While we were satisfied with the continuing attractive marketconditions for our principal lines of reinsurance and insurance propertybusiness, we declined to write business in areas where this new competition ledto less than desirable pricing and terms. For our chosen areas of growth, weare confident that pricing will remain robust for the foreseeable future. Lestthe industry should become complacent, forecasts for the 2007 hurricane seasonare already out and those involved are sticking to their guns that this yearwill be one of above average frequency and severity, notwithstanding last year'sbenign outcome. Objectives for Advent Historically, while Advent was principally a Lloyd's managing agency withsignificant third party capital participation on Syndicate 780, our returnobjective was measured in terms of achieving a 20% return on capacity over theinsurance cycle. Likewise, our employee bonus plans have been based on thereturn on capacity achieved by Syndicate 780 rather than based on objectives setat the corporate level. We successfully achieved this objective for the periodfrom 1974 to 2003 with an average return on capacity of 19%. Taking intoaccount the actual and forecast results through 2006, our average return oncapacity since 1974 now stands at 15%. Now that Advent is a quoted company and has moved to the point where it will bean integrated Lloyd's operation in 2008, we believe it is appropriate to restateour corporate objectives in terms of what we seek to achieve for ourshareholders. These are incorporated in the following four key long termfinancial objectives which are as follows: 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. 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% on capacity over the insurance cycle. 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. 4) The Company seeks to be soundly financed such that it can withstand a significant catastrophe event or series or catastrophes and remain in business to take advantage of the attractive market conditions which typically follow such events. We share in these objectives because over 60% of our staff are shareholders inthe business. We believe that the immediate key objectives for Advent in 2007 are:- • Continued prudent management of our peak catastrophe exposures to achieve more consistent but above average underwriting returns. • Take advantage of the excellent, but increasingly competitive, underwriting conditions for our classes of business, through the further development of Syndicate 780's business at Lloyd's and through the development of Advent Re into a full fledged reinsurance company. I would like to thank our shareholders, clients and supporters for their immensesupport in 2006 and especially, our employees for their hard work and effort inrising to the challenge, after a difficult 2005, to take our Company forward tothe next stage of its evolution. Brian F Caudle Chairman 22 February 2007 FINANCIAL SUMMARY 2006 2005(1) 2004(1) 2003(1) 2002(1) Restated Restated Restated Restated £'m £'m £'m £'m £'m Gross premiums written 115.4 100.5 74.7 120.2 136.1 Net premiums written 88.2 62.9 63.7 91.0 109.4 Net premiums earned 81.7 65.1 69.2 88.7 135.0 Underwriting profit (loss) 38.6 (59.1) 17.9 43.4 29.8 Profit (loss) before tax 22.2 (74.8) 4.5 18.1 13.6 Profit (loss) after tax 15.4 (52.5) 2.7 13.1 25.4 Return on equity (2) 24.0% (69.1%) 5.1% 33.0% - Per share amounts Earnings 4.2p (30.6p) 2.6p 12.4p 37.9p Dividend - 2.75p 2.75p - - Net assets 21.7p 15.7p 49.9p 50.1p 37.6p Net tangible assets 19.9p 13.3p 44.2p 43.7p 28.1p Operating ratios Claims ratio 53% 191% 74% 51% 78% Expense ratio 21%* 29% 29% 26% 23% Combined ratio 74%* 220% 103% 77% 91% * expense ratio of 30% and combined ratio of 83%, excluding foreign exchange gain 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 and 2002. 2005, 2004 and 2003 have been restatedfor changes to accounting policies. (2) Return on equity is calculated on opening shareholders' funds adjusted forthe weighted average effect of share issues during the year. Summary of 2006 results • Pre tax profit of £22.2 million. • Increase in net premiums written to £88.2 million in 2006 from £62.9 million in 2005. • Write off of unearned reinsurance cost of £1.5 million as a result of bringing forward the renewal of some of Syndicate 780's reinsurance programme to 1 January 2007. • Net notified loss ratio of 17.3% (excluding IBNR) for Syndicate 780's 2006 year of account at 31 December 2006, among the lowest such ratios since 1993. • Adverse loss development from prior years of £7.3 million, of which £6.2 million relates to 2005 hurricanes and the balance from attritional losses. • Increased investment return, net of interest on debt, to £9.1 million in 2006 from £5.5 million in 2005, reflecting higher prevailing interest rates. • Net foreign exchange gain of £4.0 million. Summary of fourth quarter 2006 results • Pre tax profit of £10.1 million reflecting underwriting return for the fourth quarter and release of unutilised catastrophe provisions. • Write off unearned reinsurance cost of £1.5 million as referred to above. • Adverse loss development from prior years of £1.4 million in the fourth quarter. • 2005 hurricanes net loss estimates increased by US$7.9 million in the fourth quarter but only increased by £0.4 million due to the weakening of the US dollar • Bonus accrual of £2.0 million, of which £0.8 million is recorded in the underwriting return and £1.2 million in corporate costs, under Advent Underwriting's employee incentive plan. • Net foreign exchange loss of £0.4 million in the fourth quarter, with a £2.3 million gain recorded in the underwriting return offset by a £2.7 million loss recorded in corporate costs. 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 thirty years throughSyndicate 780 at Lloyd's. Beginning in January 2007, the Company has alsocommenced underwriting through a new wholly owned subsidiary, Advent Re, basedin Bermuda. The Company predominantly writes property insurance and reinsurancebusiness, specialising in catastrophe-exposed business, with additionalspecialised lines including energy and marine excess of loss. Advent Underwriting, a wholly owned subsidiary, manages Syndicate 780 which hasan underwriting capacity of £150.5 million for the 2007 year of account, ofwhich the Company provides 84% (2006 - 80%). Advent Re, a Class 3 Bermudareinsurer, was established in December 2006 to take advantage of attractivemarket conditions to underwrite a limited number of retrocessional contracts, asegment of the reinsurance market in which the Company has participated as aleading underwriter for over 30 years. The Company has historically derived its income from participation in Syndicate780's results and from management fees and profit commission charged toSyndicate 780s third party capital providers. During 2006, the Company acquiredall of Syndicate 780's remaining third party capacity effective for the 2008year of account onwards. As a result, the Company does not expect to earnfurther significant management fees from third party capital providers. TheCompany expects this loss of revenue to be more than offset by the underwritingreturn arising from its ownership of the additional syndicate capacity, as wellas the profits from Advent Re's operations. Although the Company has significantly outperformed the Lloyd's markethistorically, its business is exposed to periodic significant catastropheclaims, as seen by the impact of the unprecedented level of natural disastersduring 2004 and 2005. Accordingly, if there are significant catastrophe events,the Company would expect to incur claims arising from such events which couldlead to short term underperformance relative to general insurance markets. While the Company seeks to maximise shareholder returns over the medium to longterm, it also works hard to establish and maintain long standing relationshipswith its clients and brokers and strives to offer the highest level of serviceand professionalism from both its underwriting and claims handling teams. 2006 Results For the year ended 31 December 2006, the Company's profit before tax was £22.2million, reflecting a benign claims environment, compared with a loss before taxof £74.8 million for the year ended 31 December 2005, which reflected the impactof Hurricanes Katrina, Rita and Wilma with an aggregate net loss, net ofreinsurance recoveries and reinstatement premiums, of £79.7 million. Earningsper share amounted to 4.2p for 2006 compared with a loss of 30.6p for 2005.Return on shareholders' equity was 24.0% for 2006 compared with a loss on equityof 69.1% for 2005. The significant improvement in 2006 results compared with 2005 is due to higherearned premiums from the Company's increased share of Syndicate 780's supportedcapacity in 2006 and the absence of any significant catastrophe events. The2006 results include a reduction in adverse development on claims, net ofreinsurance recoveries and reinstatement premiums, to £7.3 million for 2006 from£8.4 million in 2005. Adverse development in 2006 includes £6.2 millionrelating to the 2005 hurricanes and the balance from prior years' attritionallosses (2005: £11.5 million from the 2004 hurricanes offset by favourabledevelopment on 2003 and prior claims). Other factors include a foreign exchange gain on the Company's US dollardenominated net liabilities of £4.0 million, largely offset by a write off ofunearned reinsurance cost of £1.5 million from bringing forward the renewal ofSyndicate 780's main reinsurance programmes from 1 April to 1 January and bonusexpense, through the technical account and corporate costs, of £2.0 million asSyndicate 780's 2006 annually accounted results exceeded the threshold level forAdvent Underwriting's employee bonus plan. Sources of income 2006 2005 2004 2003 2002 £'000 £'000 £'000 £'000 £'000 Underwriting result 21,064 (78,098) (846) 18,083 8,756 Investment result 12,681 6,614 4,503 4,419 7,889 Interest on debt (3,560) (1,153) - - - Agency income 1,054 1,915 4,563 1,169 2,501 Other operating expenses (6,095) (4,198) (3,705) (11,693) (5,525) Foreign exchange gain (loss) (2,950) 77 - - - Sale of subsidiary - - - 6,073 - Operating profit (loss) 22,194 (74,843) 4,515 18,051 13,621 The Company primarily derives its operating profit or loss from underwritingactivities with agency income having been a more significant contributor for2004 and prior years. Underwriting Review Gross premiums written increased to £115.4 million for 2006 from £100.5 millionin 2005 (£72.8 million excluding reinstatement premiums) reflecting the increasein the Company's share of the supported capacity for Syndicate 780 from 53% in2005 to 80% in 2006. This increase primarily comes from the Property Insuranceand Marine (including energy) lines of business where gross premiums writtenincreased by £16.1 million and £6.8 million respectively. Net premiums written and earned for 2005 reflect net reinstatement premiums of£13.7 million from Hurricanes Katrina Rita, and Wilma. Excluding these 2005 netreinstatement premiums and the impact of Syndicate 506 reinsurance to close, netpremiums written for 2006 increased by 59% to £88.2 million from 2005 and netpremiums earned increased by 41% to £81.7 million. This increase primarilyarises from the increase in the Company's share of the underwriting capacity ofSyndicate 780. For 2005, approximately £4.9 million of earned premiums arosefrom the portfolio transfer premium received from external Names on the closureat 31 December 2004 of Syndicate 780's 2001 and 2002 years of account as aresult of the increase in the Company's capacity on the 2003 year of account ofSyndicate 780. For 2006, this only amounted to a £0.7 million effect on earnedpremiums. At 31 December 2006, the Company had net unearned premiums, net of deferredacquisition costs, of £14.0 million (2005: £10.0 million) representing potentialpipeline profits after claims incurred, principally for 2007. 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 2006 year of account at 31December 2006, the net notified loss ratio was 17.3%, one of the lowest suchratios since 1993. Syndicate 780 - Net notified loss ratio at 12 months (excluding IBNR) Year of 1993 1994 1995 1996 1997 1998 1999account% net 14.4% 24.9% 26.1% 27.1% 24.8% 38.3% 52.8%notified Year of 2000 2001 2002 2003 2004 2005 2006account% net 33.8% 95.4% 15.8% 14.6% 62.0% 134% 17.3%notified Details of the underwriting results before operating expenses for each businesssegment are set out below. Non Marine Reinsurance 2006 2005 £'000 £'000 Gross premiums written 73,104 79,640Net premiums written 52,599 57,570Net premiums earned 54,639 58,263Net claims incurred (25,837) (107,105)Underwriting result before expenses 28,802 (48,842) Net claims ratio 47% 184% Non Marine Reinsurance consists of catastrophe and individual risk cover forinsurance and reinsurance contracts written predominantly on a "losses occurringduring policy period" basis with generally no risks in excess of 12 months andwith a large proportion of risks expiring at 31 December each year. Unlike 2005 with its considerable catastrophe activity and estimated industryinsured losses of $100 billion, 2006 catastrophe activity was considerablyquieter with estimated industry insured losses of $15 billion for worldwidenatural catastrophes, the third lowest amount in the last twenty years. The Non Marine Reinsurance underwriting result before expenses of £28.8 millionfor 2006 reflects the absence of any significant catastrophe events as well asthe benefit of improvements in the underwriting environment since 2005. ForSyndicate 780's 2006 year of account, we had a net claims incurred loss ratio(including IBNR) at 31 December 2006 of 25% (2005: 181%). The US Midwest washit by a number of tornadoes with the largest event generating insured claims ofover $1.5 billion. There were also a number of individual risk lossesworldwide. These types of events are normal for the account we write and isreflected in our pricing. Underwriting conditions generally remained robust throughout 2006. Rates on UScatastrophe exposed lines increased by an average of 20% to 30%, whilst non USexposed accounts saw more level increases of an average of 5% to 10% dependenton territory. The overall account also benefited from a general tightening interms and conditions. During 2006, we continued to reduce our catastropheexposures and developed a more consistent balance between aggregate exposuresfrom any one region. Property Insurance 2006 2005 £'000 £'000 Gross premiums written 26,422 10,304Net premiums written 22,621 7,767Net premiums earned 15,963 8,991Net claims incurred (8,947) (8,495)Underwriting result before expenses 7,016 496 Net claims ratio 56% 94% Property Insurance comprises mainly commercial property, personal lines andcommercial automobile physical damage insurance written in the open market onboth a lead and following basis, either through underwriting facilities or on anindividual risk basis. The Property Insurance underwriting result before expenses of £7.0 million for2006 reflects the lack of catastrophes in the US compared with 2005 with theportfolio showing incurred loss development in line with our expectations. ForSyndicate 780's 2006 year of account, we had a net claims incurred loss ratio(including IBNR) at 31 December 2006 of 59% (2005: 109%). During 2006, the Property Insurance account benefited from considerableimprovements to terms and conditions largely driven by our US portfolio.Following the 2005 hurricanes, commercial risks saw average rate increases onopen market risks in excess of 35%, while risks accepted through facilitiesincreased by an average of 20%. In the US, personal lines accounts had morelimited increases of an average of 5% to 10% across the portfolio. Outside ofthe US, the market remained competitive with most territories flat, except forthe UK where there were reductions in rates of up to 10% on commercial lines. Marine 2006 2005 £'000 £'000 Gross premiums written 14,129 7,349Net premiums written 11,205 4,910Net premiums earned 9,378 4,663Net claims incurred (7,857) (16,794)Underwriting result before expenses 1,521 (12,131) Net claims ratio 84% 360% Marine includes marine excess of loss and offshore energy portfolios withcoverage provided for both individual risk and catastrophe accumulations. Themarine excess of loss section is written on a worldwide basis, providingreinsurance protections of insurance accounts for hull, cargo and energy. Theenergy portfolio consists of short tail offshore physical damage and operator'sextra expense cover written on a facultative reinsurance and direct basis. Mostrisks are written on an excess or limited conditions basis with the objective ofavoiding exposure to attritional losses. The Marine underwriting profit before expenses of £1.5 million for 2006benefited from the lack of hurricanes in the US although there was deteriorationon the 2005 hurricane loss estimates in the Energy portfolio and a late 2003advice on our Marine whole account reinsurance portfolio amounting to anaggregate loss of £2.2 million. For Syndicate 780's 2006 year of account, thenet claims incurred loss ratio (including IBNR) at 31 December 2006 was 37%(2005: 376%) reflecting a normal level of loss activity. The 2005 hurricane losses had a considerable impact on the Energy and Marineexcess of loss markets, both in terms of rates and conditions but, moreimportantly, in the way business was written. During 2006, the Energy market sawbusiness interruption losses largely excluded from coverage, aggregate caps fornamed hurricanes, total aggregate policy limits and average rate increases ofover 40% for Gulf of Mexico exposed accounts. The Marine excess of loss accountbenefited from changes to original risks and also saw improved rates anddeductibles. Outside of the US, the Energy account saw rate increases of 10% to20% whilst the Marine excess of loss account saw rates largely unchanged. Other 2006 2005 £'000 £'000 Gross premiums written 1,256 2,171Net premiums written 1,247 2,173Net premiums earned 1,185 2,624Net claims incurred (158) (2,642)Underwriting result before expenses 1,027 (18) Net claims ratio 13% 101% "Other" includes casualty and personal accident. Casualty is written on anexcess of loss basis with the emphasis on clash business. The majority of theaccount is written in the United States and provides cover for general casualtyclasses of auto liability, medical malpractice, workers compensation andassociated exposures. No business is written on an unlimited basis. ThePersonal Accident account consists of a mix of personal accident, kidnap andransom, sports disability and US medical business through binding authorities,line slips and reinsurance treaties. These combined business lines had an underwriting result before expenses of £1.0million for 2006. The results are, in line with plan although there was somedeterioration on 2002 and prior years of casualty lines offset by releases onthe 2004 year of account. 2005 Hurricane Losses Update For 2006, although the net loss estimates have been relatively stable insterling terms, there was some adverse development in the 2005 hurricanes netloss estimates in US dollar terms. The Company's share of Syndicate 780's netloss estimates increased by US$12.2 million (£6.2 million) or 8.5% from US$143.5million (£79.4 million) at 31 December 2005 to US$155.7 million (£79.7 million)at 31 December 2006. 31 December 2006 31 December 2005 Gross Net Gross Net Ultimate Ultimate Ultimate Ultimate US$m US$mHurricane Katrina 193.6 86.9 196.0 85.7Hurricane Rita 70.4 40.2 51.5 20.4Hurricane Wilma 74.0 28.6 53.4 37.4 Advent share of loss 338.0 155.7 300.9 143.5- US$mAdvent share of loss 172.4 79.4 167.4 79.7- £m The reinsurance recoverable on outstanding claims at 31 December 2006 amountedto £33.3 million down from £94.1 million at 31 December 2005 primarilyreflecting collection of reinsurance recoveries on the 2005 hurricanes. As setout in Note 3 to the financial statements, only 13.5% of the reinsurancerecoverables (excluding balances for which collateral is held) was fromcompanies rated BBB or below and Non Rated. Investment Performance 2006 2005 Total Company Syndicate Total Company Syndicate £'000 £'000 £'000 £'000 £'000 £'000 Financial investments 80,437 - 80,437 111,172 1,672 109,500Cash 159,409 138,214 21,195 102,795 89,237 13,558Total investments 239,846 138,214 101,632 213,967 90,909 123,058 Total investment return 12,681 6,748 5,933 6,614 2,442 4,172Interest on debt (3,560) (3,560) - (1,153) (1,153) -Net investment return 9,121 3,188 5,933 5,461 1,289 4,172 The total investment return increased to £12.7 million from £6.6 million in 2005principally resulting from the rising interest rate environment in all thecurrencies (Sterling, US dollars and Euros), with a yield of 5.5% on the averagebalance of cash and investments for 2006 compared with 3.5% for 2005. TheCompany's share of the syndicates' portfolio of cash and investments has fallenfrom £123.1 million at 31 December 2005 to £101.6 million at 31 December 2006with the payment, net of reinsurance recoveries, of £95.7 million of claims,principally arising from the 2004 and 2005 hurricanes. The syndicate paidprofits to the Company on the 2003 year of account of £19.6 million and received£34.9 million for the Company's share of the cash call on the 2005 year ofaccount. At 31 December 2006, the investment portfolio is primarily invested ingovernment or government backed securities given the Company's concerns abouttaking credit risk at a time when credit spreads are at historical lows. The Company earned a full year return in 2006 on funds raised in its equity anddebt issue in June 2005, compared with a seven month return in 2005. The netproceeds from the Company's debt issues in 2005 and 2006 have been invested incash as part of Funds at Lloyd's (FAL) such that the return on invested funds isless than the interest payable on the debt. The weighted average interest rate on outstanding debt at 31 December 2006 was9.2% or approximately 4% more than current cash investment returns. Interest ondebt for 2005 reflects the initial tranche of debt issued in June 2005. The2006 interest on debt principally reflects the June 2005 and January 2006 debtissues and increasing interest rates as three month US dollar LIBOR rose to5.36% at 31 December 2006 from 4.54 % at 31 December 2005, whilst the threemonth EURIBOR rose to 3.72% from 2.49%. Other Income Other income, representing agency fee income from third party names, decreasedin 2006, due to deficit clauses from the 2004 and 2005 years of account losseswhile the profit commission income on the 2003 year of account was included inother income for 2005. Other Expenses 2006 2005 £'000 £'000 Staff and related costs 2,051 1,839Profit related bonuses 1,230 -Other expenses 2,814 2,359 6,095 4,198 The increase in staff and related costs includes the new Chief Financial Officerand other staff turnover costs. A profit related pay scheme based upon theannually accounted profit of Syndicate 780 resulted in a total bonus expense for2006 of £2.0 million, of which £1.2 million is included in corporate costs andthe balance in the technical account. Further details of the scheme are includedin the directors' remuneration report. The Company's policy is that it is not in the business of taking foreignexchange risk. Due to the 2004 and 2005 hurricane losses, Syndicate 780 has netUS dollar liabilities, representing losses which will ultimately be called in USdollars. Since August 2006, the Company has converted FAL to US dollars so thatit maintains a matched currency balance sheet in all currencies. The weakeningof the US dollar from £1:$1.72 at 31 December 2005 to £1:$1.96 at 31 December2006 has resulted in a significant exchange loss at Company level which is morethan offset by the exchange gain on the net US dollar liability position ofSyndicate 780. In accordance with the Company's accounting policy, thecorporate loss on exchange is shown in corporate expenses, whilst theSyndicate's profit on exchange is included in the technical account operatingexpenses. 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 FAL for Syndicate 780 and by AdventRe's shareholder's equity for its Bermuda operations. 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 as necessaryto maintain is market rating, referred to as the Economic Capital Requirement(ECR) process. Total FAL at 31 December 2006 was as follows: 31 December 2006 Advent Fairfax Year of FAL FAL Account £'m £'m Applicable Advent Capital Limited(ACL) 13.2 5.0 2001, 2002, 2004, 2005Advent Capital (No. 2) Limited (ACL2) 20.9 60.5 Inter-available to ACL Advent Capital (No. 3) Limited (ACL3) 79.4 - 2006 onwards Total 113.5 65.5 For the 2006 year of account onwards, the Company set up ACL3 which, for 2007,has an ECR of 67% of capacity, unchanged from 2006. The Company has £79.4million of FAL and used £4.7 million of interim profits from its 2006 year ofaccount to support its £126 million share of Syndicate 780's capacity for 2007. The Company's other corporate members have additional FAL for payment of losseson the 2005 and prior years of account. The Company's share of the loss onclosure of the 2004 year of account is £19.4 million which will be paid from itsACL and ACL2 FAL. 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. In December 2006, the Company incorporated Advent Re, a class 3 Bermudareinsurer with capital of $37.5 million. For 2007 Advent Re will underwritereinsurance retrocession business with policy limits initially being fullycollateralised. The Company has provided capital to its operating subsidiaries using permanentcapital and unsecured long term debt financing. The long term debt issues arenot callable for five years from date of issue and have no financial covenantsother than the quarterly payment of interest and payment of principal onmaturity. In the case of the Company's US dollar and euro denominated debt due3 June 2035, amounting to an aggregate of £24.7 million at 31 December 2006, theCompany has the ability to defer interest payable on the subordinated notes for20 consecutive quarters without causing an event of default. The Company seeksto maintain its ratio of long term debt to total capital at less than 35% withthe objective of reducing that ratio over the next five years throughaccumulated earnings or as the expiry of the 'No call' provisions on its debtprovide it with an ability to refinance or repay its senior loan notes. Capital Table 2006 2005 (1) £'000 £'000 Long term debt - subordinated 24,675 27,104- senior 22,607 14,679 47,282 41,783 Shareholders' funds 88,327 63,849 Debt to equity ratio 54% 65% Debt to total capital ratio 35% 40% Interest coverage 7 x N/A (1) post January 2006 equity and debt raising 2007 Business Plan Syndicate 780's 2007 Business Plan has a gross premium income target of £130.5million, an increase of 15% over projected gross income for the 2006 year ofaccount and reflects the Company's continued focus on its property insurance andreinsurance business. The 2007 projected gross premium income by business segment is as follows: 2007 Plan £mNon Marine Reinsurance- treaty 43.2- assumed 12.2 55.4 Property Insurance 40.7 Marine- energy 20.7- cargo and war 6.0- marine excess of loss 2.6- aviation 1.0 30.3Other- casualty and other 2.8- personal accident 1.3 4.1 Gross premium income 130.5 January 2007 Renewals Syndicate 780 had budgeted to underwrite approximately 50% of its 2007 planpremium income at the commencement of the 2007 underwriting year and has largelymet this objective during the renewal season. Overall, we saw rates holding for peak catastrophe territories and, in someareas, still showing positive increases. There was downward pressure on ratesfor non peak catastrophe territories but terms and conditions were maintainedfor most classes of business. Market conditions were in line with management'sexpectations. The market continues to display a reasonably disciplined approach tounderwriting although we are seeing increased competition. In certain classesand territories, such as non US exposed worldwide catastrophe reinsurancebusiness, competition was evident and there was more pressure on orders andsignings than last year. We are also seeing increased levels of competition forcertain types of insurance risks. However, we are currently seeing no real signsthat original writers are seeking to use cheaper reinsurance capacity to developmarket share. We expect this part of our account to remain at acceptable ratinglevels during 2007. Syndicate 780 writes approximately two thirds of its Non Marine Reinsuranceaccount at 1 January 2007. Premiums written for both the Treaty and Assumedaccounts were on plan. The Treaty portfolio is largely a renewal portfolio with 92.5% of premiumswritten at 1 January 2007 being renewals. Our renewal premiums increased byapproximately 14% resulting from a combination of increased rates and share ofthe business for Syndicate 780. For the Assumed portfolio, renewal premiums increased by 8% whilst new businesswas an encouraging 39% of total premiums written as we were able to accessadditional shares in line with the underwriting plan. Terms and conditions were largely in line with our plan, with US catastrophereinsurance showing small single digit increases for non-coastal exposures butsome coastal accounts seeing further increases of 20% or more. The non-UScatastrophe account was more competitive and capacity was plentiful for mostprogrammes, with rates generally flat to down by up to 10% dependent onterritory. We continue to be disciplined in our underwriting and will not forgounderwriting profit for premium volume in the face of competition. We have targeted the Property Insurance account for growth in 2007. Business isless concentrated at 1 January 2007 than for the reinsurance book with premiumswritten to date currently running at approximately 70% of plan. We expect thatas sectors targeted for growth come up for renewal, premiums written willincrease in line with our plan. Overall, our 1 January 2007 business has gonewell with an increased share of our renewal business. Rating levels havegenerally been in line with plan with small, low single digit increases for UScatastrophe exposures and flat to 5% reductions on non-catastrophe lines. The Energy account has very little premium income written at 1 January 2007.Overall, rates were in line with plan with US exposed risks still seeing someincreases in rates of up to 10%, whilst the rest of the world largely renewed atexpiring rates. Terms and conditions remained firm and the market remainedresolute in retaining some of the improvements in deductibles and catastropheaggregate limits imposed after the 2005 hurricanes. The State of Florida recently announced that they will be increasing the levelof catastrophe cover under the Florida Hurricane Catastrophe Fund which acts asan alternative to traditional reinsurance. Our specific Florida relatedreinsurance premiums represent less than 2% of the syndicate's plan premiumincome for 2007 and therefore, we do not expect any financial impact to bematerial. Historically, Syndicate 780 has purchased the majority of its reinsurance at 1April. For 2007, given the high degree of uncertainty regarding both potentialcapacity and price for reinsurance, we decided to bring forward to 1 January therenewal of our major placements. We were successful in obtaining all of thecover we wanted at the same or lower attachment points. The cost for theprogramme is anticipated to be approximately 10% to 15% in excess of plan butthis is largely as a result of additional purchases and better cover obtained.Some of the expiring reinsurance covers were terminated at 31 December 2006,resulting in a write off of unearned reinsurance costs of £1.5 million. For Syndicate 780, premiums written are monitored at the Lloyd's Premium IncomeMonitoring rate of exchange which, for 2007, was set at $1.77 to £1,approximately 10% less than current exchange rates of $1.96 to £1. As 74% of ourgross premium income is expected to be written in US dollars, this may have anadverse impact on the actual level of gross premiums written in the absence ofother underwriting actions being taken. 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 requirement of a gross loss of 75% of capacity and a net lossof 20% of capacity. Our objective is to allow for a margin of safety from theLloyd's requirements to allow for potential variations in actual catastropheevents compared with the RDS. For Syndicate 780, this means the ability toabsorb most, of the pre tax cost of one major catastrophe loss within Syndicate780's budgeted catastrophe margin (assuming that this margin has not been erodedby smaller, attritional catastrophe losses) which, for the 2007 year of account,is approximately 16% of capacity. It should also give us the ability to absorba second major catastrophe loss from an RDS within Syndicate 780's budgetedprofit margin which, for the 2007 year of account, is approximately 20% ofcapacity. 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 over 2006continuing into 2007. In April 2006, Lloyd's also revised upward the industryloss assumptions for a number of benchmark catastrophe events within their RDSguidelines. Syndicate 780 has reduced gross peak aggregates exposures to a Florida or Gulfof Mexico Wind Event by over US$225 million from its Non Marine Reinsuranceaccount from the 2005 year of account to the 2007 year of account. Aggregateexposures for the Property Insurance account have increased but the ProbableMaximum Losses under the various RDS remain at acceptable levels. Despite thehigher Lloyd's RDS hurdles, we have significantly reduced our exposure to both agross and net loss as a percentage of capacity. 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- April 2006 $101 bn $72 bn $31 bn $51 bn $101 bn $65bn Estimated net loss as % ofcapacity (2007 Plan) 16% 16% 16% 9% 19% 15% Actual - January 2007 10% 3% 20% 8% 15% 11% The RDS at January 2007 includes certain peak aggregate exposures which will runoff during the first six months of 2007 as well as the benefit of certainOriginal Loss Warranty cover reinsurances (OLWs) which will expire over the sameperiod. Taking into account these two factors, the RDS are expected to bewithin 2007 business plan guidelines. Dividend Policy Following the losses suffered on the 2005 hurricanes, the Board of Directorsdetermined that it was not appropriate to pay a dividend in 2006. Although 2006has produced a substantial profit, the Board believes it is premature tocommence paying a dividend at this time. If we accomplish our shareholderreturn objectives in 2007, it would be our intention to reinstitute a dividendat the 2008 AGM. The Board Executive Directors Brian Caudle (aged 71) - 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 49) - 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 47) - 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 75) - 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, from 18 September2006, Advent Group Services Limited. He was Chairman of CharterhouseCommunications PLC, an AIM listed company from 1987 to 2005, Deputy Chairman ofthe Adscene Group PLC between 1987 and 1994, and Chairman of Allied Radio Plc, aquoted company, from 1994 to 1996. Mr Rowbotham is a Fellow of the Institute ofChartered Accountants of England and Wales. Mr Rowbotham is also aNon-Executive Director of other companies within the Advent Group. Eric Stobart (aged 58) - Non Executive Director Mr Stobart joined the Board on 6 January 2006. He is Director of Public Policyand Regulation for Lloyd's TSB Group PLC and is also a Non-Executive Director ofMJ Gleeson Group PLC, the Throgmorton Trust PLC, Utilico Investment Trust PLCand CMGL Syndicate Management Limited. Mr Stobart is a Trustee of the Lloyd'sTSB Group pension scheme and Chairman of its Investment Review panel. MrStobart is a Fellow of the Institute of Chartered Accountants of England andWales. He was Corporate Finance Director and Chief Executive of Hill SamuelBank before taking up his current position at Lloyd's TSB Group PLC. Peter Stormonth Darling (aged 74) - Non Executive Director Mr Stormonth Darling joined the Board of the Company on 9 November 2005. He wasChairman of Mercury Asset Management Group (now Merrill Lynch InvestmentManagers) from 1979 to 1992, and a Non-Executive Director until 1998. Hecontinues his involvement with Merrill Lynch as a director of Merrill LynchAsset Allocator plc, and is a Director of a number of other companies in the UK,US and Canada. COMPANY SECRETARY Giuseppe Perdoni (aged 42) 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 Number Held at 31 December 2006 at 1 January 2006T J Ambridge Ordinary 5p shares 460,000 260,000(1)B F Caudle Ordinary 5p shares 2,341,205 2,341,205K D Thompson Ordinary 5p shares 430,000 430,000B W Rowbotham Ordinary 5p shares 275,743 275,743E St C Stobart Ordinary 5p shares 30,000 -P Stormonth Darling Ordinary 5p shares 100,000 100,000 (1) indirectly held through Investeast Properties Limited, in which Mr Ambridge held a controllinginterest. 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 Number Held 31 December 2006 1 January 2006Charlbury Investment Ordinary 5p shares 2,035,541 1,883,327LimitedStellawell Limited Ordinary 5p shares 11,335,703 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 Number Held 31 December 2006 1 January 2006Jacgora Investments Ordinary 5p shares 1,590,014 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, todownload group 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 2006: Fairfax Financial Holdings and subsidiaries 44.46%Phoenix Asset Management Partners 17.57%Amber Master Fund (Cayman) SPC 7.19%Avenir Corporation 7.18%Zenith Insurance Company 5.42%Peter Cundill & Associates (Bermuda) Limited 4.97%Brian F Caudle 3.86%Brascan Asset Management 3.32% Charitable Donations During 2006 the Group made the following donations: Lloyd's Charities Trust £1,250Learning for Life/Crossroads £600Little Haven Children's Hospice £500The British Red Cross Emergency Response Appeal £250 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. 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 tothe audit of the Company's consolidated financial statements for the year ended31 December 2006 of which the auditors are unaware; and 2) The director has taken all steps that he ought to have taken in hisduty as a director in order to make himself aware of any relevant auditinformation and to establish that the Company's auditors are aware of thatinformation. Auditors A resolution to re-appoint PricewaterhouseCoopers LLP will be proposed at theforthcoming Annual General Meeting on 29 March 2007. By Order of the Board G PerdoniSecretary Corporate Governance Reports The Company has continued its commitment to maintaining effective corporategovernance during 2006. 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 and stage ofdevelopment. 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 2006, the Board has at any one timecomprised three Executive Directors, namely Mr Caudle, Mr Thompson, Mr Murphy(who resigned on 31 May 2006) and Mr Ambridge (who became an Executive Directoreffective 1 June 2006) and at least 3 Non-Executive Directors, namely, MrRowbotham, Mr Stormonth Darling, Mr Stobart (who joined on the 6 January 2006),Mr Salter (who resigned on 2 May 2006) and Mr Ambridge (who ceased to be aNon Executive Director on 31 May 2006). Miss Bucknell resigned as CompanySecretary on 31 December 2006. 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 theCompany's Audit, Remuneration, Investment and Nomination sub-committees.Membership of, and attendance at, the committees is set out below. The terms ofreference for the committees, along with the schedule of matters reserved forthe Board, can be found on the Company's website. The Company's underwriting activity and syndicate investment strategy isestablished, approved and monitored by the board of Advent Underwriting, whichis authorised and regulated by the Financial Services Authority. Board Attendance during 2006 Director Relevant Number of Number attended meetingsT J Ambridge 9 8B F Caudle 9 9P Stormonth Darling 9 6C E Murphy (until 31 May 2006) 3 3B W Rowbotham 9 7R M Salter (until 2 May 2006) 3 3E St C Stobart (from 6 January 2006) 8 7K D Thompson 9 9Average attendance 90% Committee Membership during 2006 Audit Remuneration Nominations Investment Committee Committee Committee CommitteeT J Ambridge No No No YesB F Caudle No No No NoP Stormonth Darling No No No Yes C E Murphy (until 31 May 2006) No No No YesB W Rowbotham Yes Yes Yes YesR M Salter (until 2 May 2006) Yes Yes Yes NoE St C Stobart (from 6 January 2006) Yes No No 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 continues to remain robustly independent in both character and judgement.There are no circumstances or relationships that would require the Board toalter his classification as independent. Audit Committee During 2006, the Company merged the separate audit committees at AdventUnderwriting and Company level to form one Group Audit Committee. The rationalefor merging the committees was to streamline the reporting process between theoperating entities and the Company, and to enable the Company to gain greateroversight of the internal control processes within the Company. 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 Audit Committee are to monitor the integrity offinancial statements, to review the effectiveness of the Company's financialreporting and internal control policies, to monitor the effectiveness of theCompany's internal audit function, to make recommendations to the Board inrelation 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 Audit Committee reviewed the Company's Interim and AnnualReport and Accounts, plans for the Company's risk management and internal auditand the appointment of external auditors for the Company as a whole.PricewaterhouseCoopers LLP, in addition to their current role as auditors forthe Company, were also appointed as auditors for the Company's managedSyndicates, following consultation with Lloyd's and Members' Agents. The AuditCommittee also considered the terms and conditions, fees and independence ofPricewaterhouseCoopers LLP and confirms the independence of the externalauditors. Attendance at each of the meetings by Committee members is set out below: Audit CommitteeRelevant Director Relevant Number of meetings Number attendedB W Rowbotham 7 7R M Salter 3 3E St C Stobart 7 7Average attendance 100% Remuneration Committee The Remuneration Committee consisted of Mr Salter (as Chairman) and MrRowbotham. It makes recommendations to the Board on matters relating to theremuneration and terms of employment of the executive directors of the Companyand on proposals for the granting of share options and other equity incentivespursuant to any share option scheme or equity incentive scheme in operation fromtime to time. Remuneration CommitteeRelevant Director Relevant Number of meetings Number attendedB W Rowbotham 1 1R M Salter 1 1Average attendance 100% At its meeting in February 2007, Mr Rowbotham assumed the role of Chairman andMr Stobart and Mr Stormonth Darling joined the Committee. Nomination Committee The Nomination Committee consisted of Mr Salter (as Chairman) and Mr Rowbotham.It meets as required and reviews the size, structure and composition of theBoard, making recommendations to the Board on all board appointments, includingthe selection of non-executive directors. The committee also makesrecommendations on re-appointment, resignation and removal of directors. The Nominations Committee met once during 2006, to formally consider theappointment of Mr Ambridge as an Executive Director and Chief Financial Officerof the Company. Attendance at the meetings by Committee members is set outbelow: Nominations CommitteeRelevant Director Relevant Number of Number attended meetingsB W Rowbotham 1 1R M Salter 1 1Average attendance 100 % At its meeting in February 2007, Mr Stobart and Mr Stormonth Darling joined theCommittee and Mr Rowbotham assumed the role of Chairman of the Committee. The Committee has considered the renomination of directors for the AGM on 29March 2007. 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, or following attaining 70 years ofage. In addition a third of the remaining Directors will also retire by rotationand therefore all Directors are subject to re-election every three years, withthe exception of Mr Rowbotham, who having served more than 9 years on the boardas a Non-Executive Director, will be submitted for re-election on an annualbasis. In addition to Mr Rowbotham, Mr Thompson will submit himself forre-election at this year's AGM. Investment Committee The Investment Committee was constituted on 12 January 2006 and consists of MrStormonth Darling (as Chairman), Mr Ambridge, Mr Rowbotham and Mr Thompson. Itheld its first meeting in March 2006 and meets quarterly. The Committee makesrecommendations to the Board regarding the investment policy and ensures theinvestment of Company funds is conducted within the policy. The Committee hasdelegated authority from the Board to set detailed investment parameters. Witheffect from December 2006, the Company merged the separate investment committeesat Advent Underwriting and Company level to form one Group Investment Committee.The rationale for merging the committees was to streamline the reporting processbetween the operating entities and the Company, and to enable the Company togain greater oversight of the management of the Company's total investmentportfolio. Attendance at each of the meetings by Committee members is set outbelow: Investment CommitteeRelevant Director Relevant Number of Number attended meetingsT J Ambridge 3 2P Stormonth Darling 3 3B W Rowbotham 2 2C E Murphy 1 1K D Thompson 2 2Average attendance 93% Corporate Social Responsibility The Company has always recognised, and continues to recognise, the importance ofvarious stakeholders to its business, including its employees, shareholders,capital providers, clients and the wider community. The Company takes intoaccount its responsibilities due to, and impact on, each of these stakeholdersin its policies and procedures. 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 2006, had an averageabsence record of 1.7 days per employee (2.4 days: 2005). Ongoing professionaldevelopment is strongly encouraged with an average of 25 hours of trainingundertaken per employee (not including additional study leave for examinations)during 2006 and around 42% of the workforce holding at least one professionalqualification. The Company's employee turnover increased to 23% during 2006 (less than 5% in2005) as the Company implemented changes in reporting frequency, lines andstructures, following its floatation and listing as a public company in 2005. Directors' Remuneration Report All members of the Committee are independent non-executive directors and they donot have any personal financial interest in the Company other than theirshareholdings 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 prior to the beginning of each year. The Committee utilises reportsprovided by Watson Wyatt as independent consultants, as well as other publiclyavailable reports in order to ensure that remuneration levels are consistentwith comparable companies, while also taking into account the Company'sperformance. Directors also receive benefits in kind such as private health careand 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 2006 shall bepayable in full by 31 March 2007. The Remuneration Committee is to review thePRP Scheme during 2007. Bonus payments to be made in respect of the 2006 year are set out in the tablebelow. Directors' Remuneration 2006 2005 Salary/ Fees Bonus Pension Taxable Total Total Benefits £ £ £ £ £ £ChairmanB F Caudle 325,000 228,431 - 4,092 557,523 328,765 Executive DirectorsT J Ambridge* 234,583 262,500 5,831 162,304 665,218 0(Appointed 01.06.06)C E Murphy** 293,875 - 32,831 1,174 327,880 199,112(Resigned 31.05.06)K D Thompson 300,000 210,859 55,248 1,897 568,004 360,803 Non-Executive DirectorsB W Rowbotham 50,000 - - - 50,000 50,000R M Salter 8,525 8,525 50,000(Resigned 02.05.06)E St C Stobart 24,519 - - - 24,519 -(Appointed 06.01.06)P Stormonth Darling 25,000 - - - 25,000 -S R Zax(Retired 08.11.05) - - - - - 21,535Total 1,261,502 701,790 93,910 169,467 2,226,669 1,010,215 * The amount disclosed for T J Ambridge for 2005 relates to the period whenhe was a non-executive director, the bonus payable is contractual as Mr Ambridgeis not a member of the PRP Scheme. ** The amount disclosed in salary/fees for Mr Murphy includes a £229,500payment made for loss of office Share Option Schemes During 2005, the Company established two share options plans: 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 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 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. The purpose of this amendment was to enable the Remuneration Committee to grantoptions at a level that would align the interests of the employees with those ofthe shareholders and to assist in incentivising staff. The Advent Share Option Schemes are open to all employees and executivedirectors. The options held over Ordinary 5p shares in the company as at 31December 2006 by executive directors serving at the year end are shown below: Options Held Director Scheme Shares under Grants Shares under Exercise Dates Options Potential option on 1 during Year option on 31 price per exercisable Profit(£) on January 2006 December 2006 share 31 December 2006T J Ambridge - - - - - - - B F Caudle AS2005 85,714 - 85,714 35p 03/06/08-03/ Nil 06/15 UAS2005 439,286 - 439,286 35p 03/06/06-03/ Nil 06/15 UAS2006 - 1,500,000 1,500,000 20p 02/05/09 - 02 217,500 /05/16 Total 525,000 1,500,000 2,025,000 217,500 K D Thompson AS2005 85,714 - 85,714 35p 03/06/08-03/ Nil 06/15 UAS2005 589,286 - 589,286 35p 03/06/06-03/ Nil 06/15 UAS2006 - 1,350,000 1,350,000 20p 02/05/09 - 02 195,750 /05/16 Total 675,000 1,350,000 2,025,000 195,750 No share options available for exercise during 2006 were exercised by directors. Future grants of awards under the Advent Share Option Plans will be approved bythe Remuneration Committee who also have the power to impose performanceconditions on such grants. The Remuneration Committee will have due regard tothe Association of British Insurers' Guidelines and the Combined Code in makingsuch awards and setting appropriate performance conditions. 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. Mr Murphy was appointed on 20 July 2001 and his contract wasterminable by either side on 12 months notice. 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. 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 whichtakes 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. As set out in the Chairman's message, itmaintains the catastrophe exposures for Syndicate 780 to any one of the Lloyd'sRDS within the Lloyd's requirement of a gross loss of 75% of capacity and a netloss of 20% of capacity. The objective is to allow for a margin of safety fromthe Lloyd's guidelines to allow for potential variations in actual catastropheevents compared with the RDS. For Syndicate 780, this means the ability toabsorb most, of the pre tax cost of one major catastrophe loss within Syndicate780's budgeted catastrophe margin (assuming that this margin has not been erodedby smaller, attritional catastrophe losses). It should also give the Companythe ability to absorb a second major catastrophe loss from the Lloyd's RDSwithin Syndicate 780's budgeted profit margin. The Company faces a variety of risks from both internal and external sourcesthat require identification, assessment and management of those risks. Riskmanagement is the process 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 Company has completed an assessment of its key risks: • 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 will be extended toinclude the 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 1985. 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. INDEPENDENT AUDITORS' REPORT TO THE MEMBERS OF ADVENT CAPITAL (HOLDINGS) PLC We have audited the group and parent company financial statements (the"financial statements") of Advent Capital (Holdings) PLC for the year ended 31December 2006 which comprise the Group Profit and Loss Account, the Group andCompany Balance Sheets, the Group Cash Flow Statement and the related notes.These financial statements have been prepared under the accounting policies setout therein. Respective responsibilities of directors and auditors The directors' responsibilities for preparing the Annual Report and thefinancial statements in accordance with applicable law and United KingdomAccounting Standards (United Kingdom Generally Accepted Accounting Practice) areset out in the Statement of Directors' Responsibilities. Our responsibility is to audit the financial statements in accordance withrelevant legal and regulatory requirements and International Standards onAuditing (UK and Ireland). This report, including the opinion, has been preparedfor and only for the company's members as a body in accordance with Section 235of the Companies Act 1985 and for no other purpose. We do not, in giving thisopinion, accept or assume responsibility for any other purpose or to any otherperson to whom this report is shown or into whose hands it may come save whereexpressly agreed by our prior consent in writing. We report to you our opinion as to whether the financial statements give a trueand fair view and are properly prepared in accordance with the Companies Act1985. We report to you whether in our opinion the information given in theDirectors' Report is consistent with the financial statements. We also report toyou if, in our opinion, the company has not kept proper accounting records, ifwe have not received all the information and explanations we require for ouraudit, or if information specified by law regarding directors' remuneration andother transactions is not disclosed. We read other information contained in the Annual Report, and consider whetherit is consistent with the audited financial statements. This other informationcomprises only the Directors' Report, the Chairman's Statement and the CorporateGovernance Reports. We consider the implications for our report if we becomeaware of any apparent misstatements or material inconsistencies with thefinancial statements. Our responsibilities do not extend to any otherinformation. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing(UK and Ireland) issued by the Auditing Practices Board. An audit includesexamination, on a test basis, of evidence relevant to the amounts anddisclosures in the financial statements. It also includes an assessment of thesignificant estimates and judgments made by the directors in the preparation ofthe financial statements, and of whether the accounting policies are appropriateto the group's and company's circumstances, consistently applied and adequatelydisclosed. We planned and performed our audit so as to obtain all the information andexplanations which we considered necessary in order to provide us withsufficient evidence to give reasonable assurance that the financial statementsare free from material misstatement, whether caused by fraud or otherirregularity or error. In forming our opinion we also evaluated the overalladequacy of the presentation of information in the financial statements. Opinion In our opinion: • the financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the group's and the parent company's affairs as at 31 December 2006 and of the group's profit and cash flows for the year then ended; • the financial statements have been properly prepared in accordance with the Companies Act 1985; and • the information given in the Directors' Report is consistent with the financial statements. PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors London 22 February 2007 The maintenance and integrity of the Advent Capital (Holdings) PLC website isthe responsibility of the directors; the work carried out by the auditors doesnot involve consideration of these matters and, accordingly, the auditors acceptno responsibility for any changes that may have occurred to the financialstatements since they were initially presented on the website. Legislation in the United Kingdom governing the preparation and dissemination offinancial statements may differ from legislation in other jurisdictions. CONSOLIDATED PROFIT AND LOSS ACCOUNT GENERAL BUSINESS TECHNICAL ACCOUNT Year ended 31 December 2006 Note 2006 2005 £'000 £'000 Earned premiums, net of reinsurance Gross premiums written 3 115,356 100,550 Ceded premiums (27,155) (37,601) Net premiums written 88,201 62,949 Change in provision for unearned premiums (8,633) 1,990 Change in provision for unearned premiums,reinsurers' share 2,126 131 (6,507) 2,121 Earned premiums, net of reinsurance 81,694 65,070 Allocated net investment income 4 5,933 4,172 Total technical income 87,627 69,242 Claims incurred, net of reinsurance Claims paid - gross amount (157,141) (91,277) - reinsurers' share 61,475 31,763 (95,666) (59,514) Change in the provision for claims - gross amount 105,387 (110,424) - reinsurers' share (52,794) 45,728 52,593 (64,696) Claims incurred, net of reinsurance (43,073) (124,210) Net operating expenses 2 (17,557) (18,958) Total technical charges (60,630) (143,168) Balance on the technical account for general business 3 26,997 (73,926) CONSOLIDATED PROFIT AND LOSS ACCOUNT NON TECHNICAL ACCOUNT Year ended 31 December 2006 Note 2006 2005 Restated £'000 £'000 Balance on the general business technical account 3 26,997 (73,926) Investment income 4 12,596 7,743 Unrealised gains on investments 517 - Investment expenses and charges 4 (386) (813) Unrealised losses on investments 4 (46) (316) Net investment income allocated to the technical account 4 (5,933) (4,172) Interest on debt (3,560) (1,153) Other income 1,054 1,915 Other expenses 2 (6,095) (4,198) Foreign exchange gain (loss) (2,950) 77 Profit (loss) on ordinary activities before tax 22,194 (74,843) Tax on profit/ (loss) on ordinary activities 6 (6,842) 22,263 Profit (loss) on ordinary activities after tax 15,352 (52,580) Dividends (Nil; 2.75p per share) - (2,896) Profit and loss account brought forward (26,195) 29,281 Profit (loss) account carried forward (10,843) (26,195) Basic Earnings per share 5 4.2p (30.6p) Diluted Earnings per share 5 4.1p (30.6p) Dividend per share Nil 2.75p The profit (loss) above is from continuing operations. There are no recognised gains or losses other than the result stated above. CONSOLIDATED BALANCE SHEET At 31 December 2006 Note 2006 2005 £'000 £'000 Assets Intangible assets 9 7,403 5,344 Investments Debt securities and other fixed income securities 4 78,838 109,024 Deposits with credit institutions 4 1,599 2,148 80,437 111,172 Reinsurers' share of technical provisions Provision for unearned premiums 3 4,457 2,331 Claims outstanding 3 33,317 94,073 37,774 96,404Debtors Debtors arising out of direct insurance operations- Intermediaries 714 1,143 Debtors arising out of reinsurance operations 38,745 63,794 Deferred tax 6 21,654 29,214 Other debtors 4 6,175 6,987 67,288 101,138Other assets Tangible assets 8 562 1,050 Cash at bank 4 159,409 102,795 Overseas deposits 3,539 3,813 163,510 107,658Prepayments and accrued income Accrued income 2,986 4,713 Deferred acquisition costs 5,862 3,311 Prepaid expenses 359 427 9,207 8,451 Total assets 365,619 430,167 CONSOLIDATED BALANCE SHEET continued At 31 December 2006 Note 2006 2005 Restated £'000 £'000 Capital and reserves Called-up share capital 5 20,329 10,981 Share premium account 13 60,662 31,759 Capital redemption reserve 13 21,065 21,065 Other reserves 13 (2,886) (3,029) Profit and loss account 13 (10,843) (26,195) Total shareholders' funds 12 88,327 34,581 Liabilities Technical provisions Provision for unearned premiums 3 24,322 15,689 Claims outstanding 3 193,101 328,487 217,423 344,176 Long term debt 5 47,282 27,104 Creditors Creditors arising out of direct insurance operations 492 120 Creditors arising out of reinsurance operations 6,306 21,039 Other creditors including taxation and social security 7 1,294 2,365 8,092 23,524 Accruals and deferred income 4,495 782 Total liabilities and shareholders' funds 365,619 430,167 Approved by the Board on 22 February 2007 PARENT COMPANY ONLY BALANCE SHEET At 31 December 2006 Note 2006 2005 Restated £'000 £'000 Fixed assets Investments in subsidiary undertakings 10 33,560 14,428 Investments 4 - 1,672 Current assets Amounts owed by subsidiary undertakings 181,366 62,730 Other debtors 281 430 Cash at bank 4 4,640 84,186 186,287 147,346 Creditors: amounts falling due within one year Amounts owed to subsidiary undertakings 7,351 9,806 Other creditors including taxation and social security 7 1,332 238 8,683 10,044 Net current assets 177,604 137,302 Total assets less current liabilities 211,164 153,402 Creditors: amounts falling due after one year Long term debt 5 47,282 27,104 Net assets 163,882 126,298 Capital and reserves Called up share capital 5 20,329 10,981 Share premium account 13 60,662 31,759 Capital redemption reserve 13 21,065 21,065 Other reserves 195 52 Profit and loss account 13 61,631 62,441 Total shareholders' funds 12 163,882 126,298 Approved by the Board on 22 February 2007 CONSOLIDATED CASH FLOW STATEMENT Year ended 31 December 2006 Note 2006 2005 £'000 £'000 Net cash outflow from operating activities 16 (17,959) (13,340) Returns on investments and servicing of finance Interest received 4,206 1,120 Interest paid on loan notes (3,427) (996) 779 124 Taxation Corporation tax paid - (72) Overseas tax received (paid) 150 (1,654) 150 (1,726) Capital expenditure Purchase of tangible fixed assets (421) (94) Purchase of capacity (1,499) - (1,920) (94)Financing Issue of ordinary share capital 39,582 40,005 Share issue expenses (1,331) (2,531) Issue of loan notes 25,277 27,102 Loan notes issue expenses (792) (873) 62,736 63,703 Ordinary dividend paid - (2,896) Net cash inflow 43,786 45,771 Cash flows were invested as follows: Increase in cash holding 17 65,633 41,525 Portfolio investmentFixed income securities- sales (197,220) (201,246)- purchases 175,922 208,620 (21,298) 7,374 Deposits with credit institutions (549) (3,128) (21,847) 4,246 Net investment of cash flows 43,786 45,771 BASIS OF PRESENTATION The Company's Accounts have been prepared in accordance with Section 255A of,and Schedule 9A to, the Companies Act 1985, and with the Statement ofRecommended Practice on Accounting for Insurance Business issued by theAssociation of British Insurers ("the ABI SORP") dated December 2005. Thebalance sheet of the holding company has been prepared in accordance withSection 226 of, and Schedule 4 to, the Companies Act 1985. The Company participates in insurance business as an underwriting member atLloyd's. The assets and liabilities arising as a result of underwritingactivities are held under various Lloyd's trust deeds and are shown separatelyin Note 11 to the Accounts. Effective 1 January 2007, the Company commencedunderwriting business through its wholly-owned Bermuda-based subsidiary, AdventRe Limited (Advent Re), which was incorporated on 21 December 2006. The Company's Accounts have been prepared in accordance with applicable UK GAAPAccounting Standards. CHANGE IN ACCOUNTING POLICY In these financial statements, the Company has adopted FRS 20 - Share basedpayments effective 1 January 2006. FRS 20 requires companies to recognise the fair value of share option schemesused to compensate staff and third parties. The fair value is calculated usingan option pricing model and is charged to the profit and loss account over thevesting period of the option. This accrual is recognised in shareholders'funds. FRS 20 requires that the results of prior periods be restated. A charge of£52,000 has been reflected in the restated non-technical account for the periodended 31 December 2005. There is no balance sheet impact Further details areincluded in Note 5. CONVERSION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) The Company will implement IFRS with effect from 1 January 2007. This willresult in the restatement of its 2006 interim and year end accounts to reflectadjustments required by IFRS so that the comparative information is presented ona consistent basis with the 2007 accounts. The Company expects that the onlymaterial change to the Company's accounting policies under IFRS will be theaccounting for goodwill and intangible assets. For 2006 and 2005, amortisationof syndicate capacity and goodwill amounted to £659,000 and £658,000respectively and will be reversed through opening retained earnings at 1 January2005 upon conversion to IFRS. Our current accounting policy for syndicate capacity and goodwill is to amortisethe balances over their useful economic life. Under IFRS, syndicate capacityand goodwill will be treated as an intangible asset with an indefinite life suchthat it will be carried at estimated fair value and will be subject to an annualimpairment review. BASIS OF CONSOLIDATION The Company's Accounts incorporate the assets, liabilities and results of theParent Company and its subsidiary undertakings drawn up to 31 December each yearusing the acquisition accounting basis except where merger accounting isappropriate. Merger accounting principles are applied where the transaction meets therequirements of the Companies Act 1985 and conforms to current accountingpractice. The last such transaction was the consolidation of Advent UnderwritingLimited (Advent Underwriting), which was acquired in 1999. BASIS OF ACCOUNTING 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 the earned proportion of premiums, net ofreinsurance. (i) 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. (ii) Unearned premiums represent the proportion of premiums written that relateto unexpired terms of policies in force at the balance sheet date. Provision ismade for any deficiencies arising when unearned premiums, net of associatedacquisition costs, are insufficient to meet expected claims and expenses aftertaking into account future investment return on the investments supporting theunearned premiums reserve and unexpired risks provision. The expected claims arecalculated based on information available at the balance sheet date. Unexpiredrisk surpluses and deficits are offset where business classes are managedtogether and a provision is made if an aggregate deficit arises. (iii) Acquisition costs, which represent commission and other related expenses,are expensed over the period in which the related premiums are earned. (iv) Reinsurance premium costs of "losses occurring during" policies are chargedover the period for which coverage is provided. Other reinsurance premium costsare recognised over the period in which related gross written premiums areearned. (v) Claims incurred comprise claims and related expenses paid in the year andchanges 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. (vi) Claims outstanding represent the ultimate cost of settling all claims(including direct and indirect claims settlement costs) arising from eventswhich have occurred up to the balance sheet date, including provision for claimsincurred but not yet reported, less any amounts paid in respect of those claims.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. Investments Investments, other than fixed interest securities, are stated at current value.For this purpose, listed investments are stated at market value on the balancesheet date. Unlisted investments for which a market exists are stated at theaverage price at which they were traded on the balance sheet date or the lasttrading day before that date. In the Parent Company only balance sheet, investments in group undertakings andparticipating interests are stated at cost, unless their value has beenimpaired. Net Investment Income Net investment income includes all investment income, realised investment gainsand losses and movements in unrealised gains and losses, net of investmentexpenses, charges and interest. Dividends are recorded on the date on which the shares are quoted ex-dividendand include the imputed tax credits. Interest, rents and expenses are accountedfor on an accruals basis. Realised gains and losses on investments carried at current value are calculatedas the difference between net sales proceeds and purchase price. In the case ofinvestments included at amortised cost, realised gains and losses are calculatedas the difference between sale proceeds and their latest carrying value.Movements in unrealised gains and losses on investments represent the differencebetween the valuation at the balance sheet date and their purchase price or, ifthey have been previously valued, their valuation at the last balance sheetdate, together with the reversal of unrealised gains and losses recognised inearlier accounting periods in respect of investment disposals in the currentperiod. Net investment income is initially recorded in the non-technical account. Anallocation is made to the technical account of the net investment income oninvestments supporting the insurance technical provisions and relatedshareholders' funds. Foreign Currency Translation All monetary assets and liabilities expressed 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. Foreign currency transactions are translated at the average rate ofexchange during the year. Foreign exchange differences on syndicate transactionsare reported in operating expenses in the technical account. Foreign exchangedifferences on non-syndicate transactions are reported in other charges in thenon-technical account. Debtors and Creditors arising from insurance and reinsurance operations Debtors and creditors include the totals of the company's share of all thesyndicates' outstanding debit and credit transactions as processed by XChangingIns-sure Services Ltd. No account has been taken of any offsets which may beapplicable in calculating the net amounts due between the syndicates and theircounterparty insureds, reinsurers or intermediaries as appropriate. Tangible Fixed Assets Depreciation is provided on all tangible fixed assets 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 years Computer equipment 3 years Intangible Fixed Assets Costs incurred by the Company in the Corporation of Lloyd's auctions in order toacquire rights to participate on syndicates' underwriting years are included inintangible fixed assets and amortised over an estimated useful economic life offifteen years from the start of the underwriting year of account for which thecosts are incurred. Goodwill arising on acquisitions is capitalised in the balance sheet andamortised through the profit and loss account over its estimated useful economiclife of ten years on a straight line basis, subject to an annual impairmentreview. Deferred Taxation Deferred tax is provided in full on timing differences which result in anobligation at the balance sheet date to pay more tax, or a right to pay lesstax, at future dates, at rates expected to apply when they crystallise based oncurrent tax rates and law. Timing differences arise from the inclusion of itemsof income and expenditure in taxation computations in periods different fromthose in which they are included in the Accounts. Deferred tax is not providedon timing differences arising from the revaluation of fixed assets where thereis no commitment to sell the assets, or on unremitted earnings of subsidiariesand associates where there is no commitment to remit those earnings. Deferredtax assets are recognised to the extent that it is regarded as more likely thannot that they will be recovered. Deferred tax assets and liabilities are notdiscounted. Pensions The Company pays contributions to the individual money purchase schemes ofdirectors and employees. Contributions are charged to the Profit and LossAccount as incurred. 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 profit and loss account over the vesting period. The accruedliability is recognised as a component of shareholders' funds. Upon exercise,the par value is reflected within share capital with the excess proceedsreceived, net of any transaction costs, over the par value reflected as part ofshare premium. NOTES TO THE ACCOUNTS 1. FOREIGN EXCHANGE RISK MANAGEMENT The Company's functional currency is sterling and its net assets are located inthe UK. Its operations are conducted in a number of currencies, the principalones of which are US$, £, CDN$ and Euro. The Company's policy is that it is notin the business of taking or speculating on foreign currency risk. Itsobjective is to match each major currency position (US$, £, CDN$ and Euro),including its share of the underlying assets and liabilities of its managedsyndicates. The Company expects that syndicate losses will be called in thecurrency in which they occur with third party names responsible for any foreigncurrency mismatch relating to their share of the syndicate's net assets orliabilities. The Company has designated $37.5 million of its long term US dollar debt as ahedge of its capital investment in Advent Re, a company whose functionalcurrency is the US dollar. The designated debt consists of $17.5 million, due 15January 2026 and $20 million, due 15 December 2026. Monthly, the Company reviews its consolidated foreign currency balance sheet,prepared in its principal currencies (US$, £, CDN$, and Euro), including itsshare of the assets and liabilities of its managed syndicates. It separatelyassesses the continuing effectiveness of the hedge of its investment in AdventRe. Action is taken to reduce or mitigate foreign currency mismatches throughthe purchase or sale of the appropriate currencies. The Company does not usederivative instruments to manage its net foreign currency position. The principal exchange rates used in translating foreign currency assets,liabilities, income and expenditure in the preparation of these accounts were: 2006 2005 Period Period Period Period average end average end rate rate rate rate US dollar 1.84 1.96 1.82 1.72Euro 1.47 1.48 1.46 1.46Canadian dollar 2.09 2.28 2.21 2.01 For the year ended 31 December 2006, the Company's gross premiums were writtenin the following currencies: 2006 2005 £m % £m % US dollar 84.5 73.2 76.9 76.4£ sterling 26.2 22.8 20.7 20.6Canadian dollar 4.7 4.0 3.0 3.0Gross premiums written 115.4 100.0 100.6 100.0 At 31 December 2006, the Company's asset and liability positions in its majorforeign currencies were as follows: 2006 2005 US$m £m CDN$m •m US$m £m CDN$m •m Total assets 467.5 109.4 20.2 12.3 440.1 206.9 13.7 12.3 Total liabilities (434.7) (41.3) (9.9) (13.4) (587.6) (44.7) (11.5) (14.5) ------------ --------- --------- --------- ---------- ---------- ---------- --------- Net assets (net 32.8 68.1 10.3 (1.1) (147.5) 162.2 2.2 (2.2)liabilities) ------------ --------- --------- --------- ---------- ---------- ---------- --------- On 5 January 2007, the Company sold US$20 million and bought sterling equivalentto reduce its long position in US dollars at 31 December 2006. For the year ended 31 December 2006, the Company had foreign exchange gains andlosses which were recorded in the consolidated profit and loss account asfollows: 2006 2005 £'000 £'000Underwriting result 6,991 (4,142)Corporate costs (2,950) 77Net gain (loss) 4,041 (4,065) The foreign exchange gain principally resulted from the impact of the weakeningUS dollar against sterling on the Company's share of Syndicate 780's net USdollar losses from the 2005 hurricanes, during the first half of 2006. In thethird quarter, the Company sold sterling and bought US dollars to eliminate thismismatch position. 2. BUSINESS SEGMENT 2006 2005 Restated £'000 £'000 UnderwritingTechnical account 26,997 (73,926) Managing AgencyAgency fees 301 595Expenses recharged to Syndicates 753 498Profit commission - 822 1,054 1,915 CorporateInvestment income on corporate funds 6,748 2,442Interest on debt (3,560) (1,153)Other expenses (6,095) (4,198)Foreign exchange gain (loss) (2,950) 77 Profit (loss) before tax 22,194 (74,843) Operating and other expenses included the following: 2006 2005 £'000 £'000 Acquisition costs 17,666 10,500Admin expenses 6,882 4,315Amortisation of Syndicate Capacity costs (Note 13) 141 140Amortisation of goodwill (Note 13) 518 518Depreciation of tangible fixed assets (Note 16) 909 529 Audit servicesFees payable to the Company's auditor for the audit of the Parent Company and consolidated accounts* 191 100Non-audit servicesFees payable to the Company's auditor and its Associates for other services:The audit of the Company's subsidiaries 45 45Fees payable to the Company's auditor for the audit of Managed syndicates 159 - of which recharged to third party capital (70) -Other services supplied pursuant to legislation(interim financial statements review) 58 45Tax services 22 -Valuation and actuarial services 175 - of which recharged to third party capital (87)Services relating to corporate finance transactions - 380Other services not covered above 10 493 580 During the year, the Company's auditor (PricewaterhouseCoopers LLP) was alsoappointed as auditor of the Company's managed syndicates. * Includes costs of £125,000 in relation to additional costs incurred on theaudit of the 2005 Accounts. 3. INSURANCE RISK MANAGEMENT The Company is exposed to insurance risk through its underwriting activities.Insurance risk arises from the possibility that an insured event occurs and theuncertainty as to the timing of submission and the ultimate amount of theresulting claim. The Company predominantly writes property insurance and reinsurance business,specialising in catastrophe-exposed business, with additional specialised linesincluding energy and marine excess of loss. The Company's four principal linesof business have the following insurance risk characteristics: a) Non Marine Reinsurance consists of catastrophe and individual riskcover for insurance and reinsurance contracts written predominantly on a "lossesoccurring during policy period" basis with generally no risks in excess of 12months and with a large proportion of risks expiring at 31 December each year. b) Property Insurance comprises mainly commercial property, personallines and commercial automobile physical damage insurance written in the openmarket on both a lead and following basis, either through underwritingfacilities or on an individual risk basis. c) Marine includes marine excess of loss and offshore energy portfolioswith coverage provided for both individual risk and catastrophe accumulations.The marine excess of loss section is written on a worldwide basis, providingreinsurance protections of insurance accounts for hull, cargo and energy. Theenergy portfolio consists of short tail offshore physical damage and operator'sextra expense cover written on a facultative reinsurance and direct basis. Mostrisks are written on an excess or limited conditions basis with the objective ofavoiding exposure to attritional losses. d) Other includes casualty and personal accident. Casualty is writtenon an excess of loss basis with the emphasis on clash business. The majority ofthe account is written in the United States and provides cover for generalcasualty classes of auto liability, medical malpractice, workers compensationand associated exposures. No business is written on an unlimited basis. ThePersonal Accident account consists of a mix of personal accident, kidnap andransom, sports disability and US medical business through binding authorities,line slips and reinsurance treaties. The Board of Directors sets the Company's overall risk appetite for insuranceand catastrophe risk with specific parameters for risk set out in the approvedannual business plan. Management of insurance risk on an operational basis isthe responsibility of the Chief Underwriting Officers of Advent Underwriting andAdvent Re. The Company maintains strong underwriting disciplines to mitigate its exposureto catastrophe losses using an underwriting team with significant expertise inthe business lines they write and with a well diversified portfolio of clientswith whom the Company has long-established relationships. In 2006,approximately 84% of gross premiums written came from the Company's existingclients. The Company's approach to underwriting is governed by key principles which runthroughout the underwriting units and are continuously monitored by management.Strict underwriting guidelines are adopted in terms of class of business, linesize and in terms of policy periods, which are preferably limited to 12 months.The Company's policy is that it does not write excess of loss reinsurancecontracts on an unlimited basis. Any risk which falls outside agreed guidelinesmust be approved by the Chief Underwriting Officer before the risk isunderwritten and is reported to Executive Management. The Chief UnderwritingOfficers report at least monthly to executive management on underwriting resultsagainst the approved business plan. With the exception of the Property Insurance account, the Company retainscontrol of the business written rather than delegating the authority to acceptrisk to third parties. For the Property Insurance account, delegation ofauthority to third parties is only made where the Company is completelysatisfied as to coverholders' competence and suitability based on personalcontacts and visits, previous experience and regular audits. Bindingauthorities are principally used in the Property Insurance account and accountedfor £15.2 million of gross premiums written for the year ended 31 December 2006,of which 47% was in respect of clients which have been with the Company for fiveor more years. The Company manages its insurance and reinsurance business without over relianceon reinsurance protection purchased. The Company uses reinsurance, principallypurchased on an excess of loss basis, to reduce the impact of probable maximumlosses following major catastrophe events to levels within the Company's riskappetite for exposure to such catastrophe losses. The reinsurance programme isdetermined predominantly using realistic disaster scenarios (RDS) as a guide tothe amount of cover required and considers a number of other factors includingreinsurance security, availability of reinsurers and retrocessional reinsurers,pricing, terms and conditions and commercial relationships. Specific protections are purchased to cover the major classes written and theprogramme is designed to provide significant vertical cover for major losses.The Company records all of its exposures and, in the case of Syndicate 780, usesRDS analysis and industry accepted third party catastrophe modelling software tomonitor and analyse its peak exposures and estimated losses, based on keyconcentrations of risk. For 2006 and prior years, the main reinsurance programme was purchased at 1April of each year. Given the expected tight market conditions for reinsurancecapacity as at 1 January 2007, the Syndicate renewed its main reinsuranceprogrammes as at 1 January 2007 which involved the cancellation and replacementof certain reinsurance contracts resulting in a write off of unearnedreinsurance cost of approximately £1.5 million which was expensed at 31 December2006. The Company's reinsurance costs as a percentage of gross written premiums forthe last five years is set out below: Ceded premiums 2006 2005 2004 2003* 2002* £m £m £m £m £mGross Premiums Written (GPW) 115.4 100.5 80.1 120.2 136.1Total Ceded Premiums (27.2) (37.6) (11.9) (29.2) (26.7) Net Premiums Written 88.2 62.9 68.2 91.0 109.4 Total Ceded Premiums as % of GPW 23.6% 37.4% 14.9% 24.3% 19.6% * The figures for 2003 and 2002 are quoted excluding business subject toindemnity from Fairfax. Ceded premiums for 2005 included reinstatement premiums of £27.8 million, cededreinstatement premiums of £14.1 million and a reinsurance to close premium of£10.3 million in respect of Syndicate 506. Excluding these premiums, the cededpremiums as a percentage of gross written premium was 18.2%. The security of the Company's proposed and existing reinsurers is reviewed andapproved by the Advent Underwriting Board. The objective is to ensure that theoutward placement of reinsurance is placed with reinsurers of an acceptablelevel of security. The core list of approved reinsurers currently consists of16 Lloyd's syndicates and 28 reinsurance companies all of which are rated A- orhigher, or are trust fund backed. Reinsurers are selected depending on their rating by either AM Best or Standard& Poors. No reinsurer is selected with a rating below A except in specificcircumstances and with the prior approval of the Advent Underwriting Board orwhere the policy limits are fully collateralised. For the 2007 reinsuranceprogramme, the Company's reinsurance exposure is provided by reinsurers rated asfollows: Exposure £'000ReinsurersA++ 2,700A+ 33,550A - companies 50,386A - Lloyd's syndicates 13,189A- 22,000Not rated - fully collaterised limits 40,000 Total exposure 161,825 The Company reviews amounts due from reinsurers on paid losses, amountsrecoverable from reinsurers on outstanding losses and amounts in dispute todetermine if a provision for bad debts is required. The Company's policy is toprovide for reinsurer bad debts in situations where it does not expect tocollect the full amount outstanding due to the financial position of thereinsurer or due to disputes over coverage. In the case of Syndicate 2, theCompany also establishes a general provision for bad debts based on the riskrating of the outstanding reinsurance recoverable, which amounted to £0.3million at 31 December 2006. Historically, Syndicate 780 has not hadsignificant bad debt expense and accordingly, no general provision has beenestablished. UNDERWRITING YEAR OF ACCOUNT RESULTS The Company's share of the syndicates' technical accounts by underwriting yearsof account has been reflected in the income statement as follows: Year ended 31 December 2006 2005 2004 2003 2002 £'000 £'000 £'000 £'000 £'000Syndicate 780 - Non MarineUnderwriting Year of Account2006 - open 22,2392005 - open 2,188 (64,412) - - -2004 - closed 1,269 (14,867) (5,032) - -2003 - closed - 4,850 9,533 19,358 -2002 - closed - - 1,989 4,217 13,673 Balance on technical account 25,696 (74,429) Syndicate 2 - MarineUnderwriting Year of Account2002 - run-off 419 690 (2,294) 2,776 5,9872001 - run-off 882 (253) (559) (4,017) (1,090) Balance on technical account 1,301 437 Syndicate 506 - Non-MarineUnderwriting Year of Account2001 - closed Balance on technical account - 66 (1,124) (975) 2,859 Total balance on technical account 26,997 (73,926) The figures above exclude profit commission and agency fees payable to AdventUnderwriting. Syndicate 2 ceased active underwriting with effect from 31 December 2002. Since2002, the Company's share of Syndicate 2's run-off results has been a cumulativeloss of £2.4 million. INSURANCE SEGMENT RESULTS Syndicate 780 Syndicate Total 2 Non-Marine Property Reinsurance Insurance Marine Other £'000 £'000 £'000 £'000 £'000 £'000 2006Gross premiums written 73,104 26,422 14,129 1,256 445 115,356Net premiums written 52,599 22,621 11,205 1,247 529 88,201Net premiums earned 54,639 15,963 9,378 1,185 529 81,694Net claims incurred (25,837) (8,947) (7,857) (158) (274) (43,073)Net underwriting result 28,802 7,016 1,521 1,027 255 38,621 Net operating expenses (24,548)Profit on exchange 6,991Allocated investment return 5,933 Technical result 26,997 Syndicate 780 Syndicate Total 2 & 506 Non-Marine Property Reinsurance Insurance Marine Other £'000 £'000 £'000 £'000 £'000 £'000 2005Gross premiums written 79,640 10,304 7,349 2,171 1,086 100,550Net premiums written 57,570 7,767 4,910 2,173 (9,471) 62,949Net premiums earned 58,263 8,991 4,663 2,624 (9,471) 65,070Net claims incurred (107,105) (8,495) (16,794) (2,642) 10,826 (124,210)Net underwriting result (48,842) 496 (12,131) (18) 1,355 (59,140) Net operating expenses (14,816)Loss on exchange (4,142)Allocated investment return 4,172Technical result (73,926) All premiums are written in the United Kingdom. PROVISION FOR CLAIMS The establishment of claims reserves represents the area of greatest uncertaintyin preparing insurance company accounts. Reserves for future anticipated claimsare made based on information available at the time of preparation of theaccounts. Any "best estimate" of ultimate claims needs to be viewed as a pointvalue within a likely range of outcomes. The nature of each insurer's business,and the reinsurance arrangements in place, influence how wide that likely rangeof outcomes will be. The estimation of claims incurred but not reported (IBNR) is generally subjectto a greater degree of uncertainty than the estimation of the cost of settlingclaims already notified to the Company, where more information about the claimevent is generally available. Claims IBNR may often not be apparent to theinsured until many years after the event giving rise to the claims has happened.Classes of business where the IBNR proportion of the total reserve is high, suchas casualty, will typically display greater variations between initial estimatesand final outcomes because of the greater degree of difficulty of estimatingthese reserves. Classes where claims are typically reported relatively quicklyafter the claim event tend to display lower levels of volatility. In calculatingthe estimated cost of unpaid claims the Company uses a variety of estimationtechniques, generally based upon statistical analyses of historical experience,which assumes that the development pattern of the current claims will beconsistent with past experience. Allowance is made, however, for changes or uncertainties which may createdistortions in the underlying statistics or which might cause the cost ofunsettled claims to increase or reduce when compared with the cost of previouslysettled claims including: - changes in the Company's underwriting and claims processes which might accelerate or slow down the development and/or recording of paid or incurred claims compared with the statistics from previous periods - changes in the legal environment - the effects of inflation - changes in mix of business - the impact of large losses - movements in industry benchmarks A component of these estimation techniques is usually the estimation of the costof notified but not paid claims. In estimating the cost of these claims theCompany has regard to the claim circumstance as reported, any informationavailable from cedants and information on the cost of settling claims withsimilar characteristics in previous periods. Large claims impacting each relevant business class are generally assessedseparately, being measured on a case by case basis or projected separately inorder to allow for the possible distortive effect of the development andincidence of these large claims. For major natural catastrophe events, the original loss estimate for all 'onrisk' exposures is analysed using computer simulation to ascertain thoseaccounts likely to be impacted. From the initial output, modelled lossestimates, per account, are generated. An underwriting review of the account, bycedant, is then conducted to validate the individual loss estimates and, whereapplicable, amend the model driven estimates with underwriter input relevant tothe particular features of the loss and its anticipated impact on an account.Where accounts cannot be analysed, using catastrophe-modelling software,benchmark analysis is conducted, again on an account by account basis, togenerate loss estimates. As more specific client information becomes availablethe ultimate loss estimates are updated from the initial forecast to reflect theclient specific data. Where possible, the Company adopts multiple techniques to estimate the requiredlevel of provisions. This assists in giving greater understanding of the trendsinherent in the data being projected. The projections resulting from the variousmethodologies also assist in setting the range of possible outcomes. The mostappropriate estimation technique is selected taking into account thecharacteristics of the business class and the extent of the development of eachaccident year. Provisions are calculated gross of any reinsurance recoveries. A separateestimate is made of the amounts that will be recoverable from reinsurers basedupon the gross provisions and having due regard to collectibility. Actual claims experience will always differ from projected estimates. Suchdifferences in relation to risks previously earned are recognised in the incomestatement in the accounting period during which the difference is identified. The Company's claims reserves are calculated by the Company's Chief Actuary andunderwriters with input from the claims manager. These reserves are reviewedand approved quarterly by the Reserve Group, Executive Management and the Board. Annually, the reserves of the Syndicates are reviewed by external actuarieswho issue valuation opinions on the adequacy of reserves. The movement in the Company's claims reserves for the year ended 31 December2006 is set out below: Provision for Claims Total unearned premiums outstanding £'000 £'000 £'000GrossAt 1 January 2006 15,689 328,487 344,176Exchange adjustments (29,999) (29,999)Movements in provisions - Current year 8,633 28,847 37,480 - Prior year 22,874 22,874 - Paid claims (157,108) (157,108)At 31 December 2006 24,322 193,101 217,423 Reinsurers' shareAt 1 January 2006 2,331 94,073 96,404Exchange adjustments (7,962) (7,962)Movements in provisions - Current year 2,126 1,152 3,278 - Prior year 7,529 7,529 - Paid recoveries (61,475) (61,475)At 31 December 2006 4,457 33,317 37,774 GrossAt 1 January 2005 13,699 191,925 205,624Exchange adjustments 25,465 25,465Movements in provisions - Current year 1,990 193,831 195,821 - Prior year 8,543 8,543 - Paid claims (91,277) (91,277)At 31 December 2005 15,689 328,487 344,176 Reinsurers' shareAt 1 January 2005 2,200 41,088 43,288Exchange adjustments 7,257 7,257Movements in provisions - Current year 131 74,639 74,770 - Prior year 2,853 2,853 - Paid recoveries (31,764) (31,764)At 31 December 2005 2,331 94,073 96,404 NetAt 31 December 2006 19,865 159,784 179,649At 31 December 2005 13,358 234,414 247,772At 31 December 2004 11,499 150,837 162,336 For the year ended 31 December 2006, adverse development on claims, net ofreinstatement premiums, amounted to £7.3 million (2005: £8.4 million). The claims outstanding balance is further analysed between notified outstandingclaims and incurred but not reported claims (IBNR) below: 2006 2005 Gross Net Gross Net £'000 £'000 £'000 £'000 Notified outstanding claims 143,184 114,653 221,504 146,463Claims incurred but not reported 49,917 45,130 106,983 87,951Claims outstanding 193,101 159,783 328,487 234,414 The breakdown of the gross and net claims reserves by category of claims is setout below. 2006 2005 Gross Net Gross Net £'000 £'000 £'000 £'000 Large catastrophe provisions, recently incurred 66,308 44,800 183,600 107,827All other short tail provisions 50,372 49,647 48,212 47,458Long-tail provisions (casualty) 24,311 24,311 29,570 29,570Run off provisions (Syndicate 2) 52,110 41,026 67,105 49,559Total 193,101 159,784 328,487 234,414 Large catastrophe provisions include the 2004 and 2005 hurricanes. All othershort tail provisions represent property-related coverages where the majority ofclaims are expected to be reported within two years of the occurrence of theclaim. Long tail provisions consist of Syndicate 780's casualty and PersonalAccident accounts. Syndicate 2 has been in run-off since the 2002 year ofaccount. Its claims provisions principally consist of its marine and aviationand excess of loss reinsurance accounts, with outstanding gross and net WorldTrade Center (WTC) losses of £29.6 million and £26.2 million respectively. The following table shows the adverse or favourable development of claims, on agross and net basis, determined on an accident year basis, from the amountsoriginally estimated at the end of the preceding year. The claims have beengrossed up to include 100% of Syndicates 2 and 780 claims rather than the claimsthat reflect the Advent's percentage ownership of each syndicate's capacityduring the respective accident years. Claims in currencies other than sterlinghave been reconverted at 31 December 2006 exchange rates for all accident years. Ultimate gross claims Accident year 2001 2002 2003 2004 2005 2006 Total and prior £'m £'m £'m £'m £'m £'m £'mAt the end ofaccident year 1,091 137 83 151 340 41 One year later 1,145 108 67 195 376 Two years later 1,158 104 58 196 Three years later 1,151 103 58 Four years later 1,151 101 Five years later 1,154 Estimate ofcumulative claims 1,154 101 58 196 376 41 1,926 Cumulativepaid claims (1,546) Less third partyparticipations onsyndicates (188) Gross claimsliability * 192 Favourable(unfavourable)development (63) 36 26 (45) (36) - * Gross Claims reserves per balance sheet of £193 million includes additionalclaims handling and offset adjustments of £1 million. Ultimate net claims Accident year 2001 2002 2003 2004 2005 2006 Total and prior £'m £'m £'m £'m £'m £'m £'mAt the end ofaccident year 670 116 82 114 206 41 One year later 726 96 65 143 222 Two years later 739 94 57 146 Three years 741 93 55later Four years later 747 92 Five years later 751 Estimate ofcumulativeclaims 751 92 55 146 222 41 1,307 Cumulativepaid claims (995) Less third partyparticipationson syndicates (154) Net claimsliability * 158 Favourable(unfavourable)development (81) 24 27 (33) (16) - * Net Claims reserves per balance sheet of £160 million includes additionalclaims handling, bad debt and offset adjustments of £2 million. The gross and net adverse development, on an accident year basis, is primarilyrelated to WTC for 2001 and prior and to the 2004 and 2005 hurricanes for thoserespective accident years. CATASTROPHE LOSSES The gross and net loss estimates, after reinstatement premiums and reinsurancerecoveries, for the 2004 and 2005 hurricanes has entailed an assessment of allthe latest loss information from cedants together with other market informationcurrently available to the Company. As with any estimate, there will always bean element of uncertainty regarding provisions for outstanding claims. The sizeof the 2004 and 2005 hurricane claims in total, and in particular those arisingfrom Hurricanes Katrina, due to its size, and Wilma, due to its interaction withHurricane Rita for priority of settlements on reinsurance placements, allincrease that level of uncertainty. The gross and net loss estimates of the 2004 and 2005 hurricanes have developedas follows. 2006 2005 2004 Gross Gross Gross $m $m $m2005 HurricanesPaid 226.6 31.7Outstanding 95.5 160.7IBNR 15.9 108.5Gross loss 338.0 300.9Reinsurance recoverable (182.3) (157.4)Net loss - US$ 155.7 143.5Net loss - £ 79.4 79.7 2004 HurricanesPaid 120.1 94.3 27.3Outstanding 13.5 35.5 46.2IBNR 3.9 6.2 27.5Gross loss 137.5 136.0 101.0Reinsurance recoverable (56.3) (60.3) (46.1)Net loss - US$ 81.2 75.7 54.9Net loss - £ 41.4 44.0 28.5 Development incurredGross- US$ 38.6 35.0- £ (11.4) 26.5 Net- US$ 17.7 20.8- £ (2.9) 15.4 All of the reinsurance cover for Hurricane Katrina has been exhausted such thatany movements in gross claims directly impact on the net cost to the Company.Further cover remains for one loss, which is currently utilised by HurricaneWilma, which results in movements in its gross claims being largely passed toour reinsurers. With the current level of losses, movements in gross claims onHurricane Rita also impact net to the Company. REINSURANCE RECOVERABLE At 31 December 2006, the Company's outstanding reinsurance recoverable onoutstanding claims amounted to £33.3 million with reinsurers with the followingrisk ratings by AM Best (or equivalent S&P rating in the absence of an AM Bestrating): Risk Rating Reinsurance recoverable £'000 %A+ 2,579 7.7Lloyd's 3,686 11.1A 11,010 33.0A- 5,475 16.4Trust fund backed 6,111 18.3BBB or below and Non Rated 4,456 13.5 Total 33,317 100.0 Included in other debtors are the following reinsurer balances: Syndicate 780 Syndicate 2 Total £'000 £'000 £'000Due on paid losses 2,934 8,410 11,344Provision for uncollectible reinsurance - (3,932) (3,932) Net 2,934 4,478 7,412 4. FINANCIAL RISK MANAGEMENT The Company is exposed to financial risk through its financial assets andliabilities. The key financial risk is that proceeds from financial assets arenot sufficient to fund the obligations arising from policies as they fall due.The most important components of financial risk are interest rate risk, creditrisk and liquidity risk. Interest rate risk arises primarily from investments in fixed rate securities.In addition, to the extent that claims inflation is correlated to interestrates, liabilities to policyholders are exposed to interest rate risk. TheCompany is also exposed to interest rate risk through its floating rateunsecured subordinated and senior loan notes which are linked to US LIBOR in thecase of the US dollar dominated debt and EUROBOR in the case of the eurodenominated debt. The Company mitigates interest rate risk by maintaining its investment portfolioand Funds at Lloyd's (FAL) in short-dated fixed income securities, cash and cashequivalents. The interest rates on these short term investments tend tofluctuate with movements in central bank lending rates. At 31 December 2006, all of the Company's cash and short term investments hadmaturities of 90 days or less. Credit risk is the risk that a counterparty will be unable to pay amounts infull when due. Key areas where the Company is exposed to credit risk are: - exposure to corporate bonds and other fixed income securities - amounts due from reinsurers on paid and outstanding losses - amounts due from policyholders and intermediaries The Company places limits on its exposure to any single counterparty forinvestments and reinsurers and to geographical and industry segments. The Company's current investment strategy is to invest in short term governmentor government guaranteed treasury bills and bonds with operating cash placed ondeposit with highly rated banks for very short maturities of 30 days or less.The Company does not invest in derivatives, or currently in asset backedsecurities or securities of government agencies which do not benefit from a fullgovernment guarantee. Liquidity risk is the risk that cash may not be available to pay obligationswhen due at a reasonable cost. The Company monitors its liquidity needs throughmonthly cash flow forecasts at syndicate and parent company level. Given itsexposure to large catastrophe events, the Company currently maintains itsfinancial investments in short term investments and cash equivalents to providethe necessary liquidity to fund claims payments as they come due. In addition, the Company has a US$25 million bank facility at syndicate level,maturing 30 April 2007 and secured by eligible premiums receivable and amountsdue from reinsurers, which can be used to fund gross loss payments or US situsfund deposits until such time as amounts due from reinsurers is collected. NET INVESTMENT INCOME 2006 2005 £'000 £'000Investment income Income from financial investments 12,092 7,570Gains on the realisation of investments 504 173 12,596 7,743Investment expenses and charges Investment management expenses (105) (93)Loss on the realisation of investments (281) (720)Unrealised losses on investments (46) (316) (432) (1,129)Net investment income 12,681 6,614 Allocated toGeneral business technical account 5,933 4,172Non-technical account 6,748 2,442 FINANCIAL INVESTMENTS 2006 2005 £'000 £'000Carrying value Debt securities and other fixed income securities- government and government guaranteed 75,930 76,611- corporate and other 2,908 29,441- asset backed securities - 2,972Deposits with credit institutions 1,599 2,148 80,437 111,172 Purchase Price Debt securities and other fixed income securities- government and government guaranteed 75,490 78,155- corporate and other 2,976 28,097- asset backed securities 3,052Deposits with credit institutions 1,599 2,148 80,065 111,452Parent Company only Deposits with credit institutions - 1,672 All debt securities and other fixed income securities apart from asset-backedsecurities are listed on recognised stock exchanges. The corporate and othersecurities matured after 31 December 2006 and were reinvested in governmentsecurities. CASH AT BANK 2006 2005 £'000 £'000 Corporate cash at bank 5,541 2,027Syndicates' cash at bank 21,195 13,558Advent Re cash at bank 19,132 -Corporate funds held by Lloyd's 113,541 87,210 159,409 102,795 Parent Company onlyCash at bank 4,640 84,186 At 31 December 2006, the cash at bank was held with Royal Bank of Scotland andBarclays Bank. The corporate funds held by Lloyd's are invested by Lloyd's inpooled money market funds on which the Company receives current cash rates. OTHER DEBTORS 2006 2005 £'000 £'000 Other debtors- corporate 1,566 2,284- syndicates 4,609 4,703 6,175 6,987 At 31 December 2006, no single entity accounted for 5% or more of the aggregateamount of other debtors. MORE TO FOLLOW This information is provided by RNS The company news service from the London Stock Exchange

---

Related Shares:

ADV.L