22nd Feb 2008 07:00
Advent Capital (Holdings) PLC22 February 2008 Part 2 of 2 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 US$49.4 million (2006: US$37.5 million) of its longterm US dollar debt to fully hedge its investment in Advent Re of US$49.4million at 31 December 2007 (2006: US$37.5 million). The designated debtconsists of US$26 million, due 15 January 2026, US$20 million, due 15 December2026 and US$3.4 million due 3 June 2035. Monthly, the Company reviews its consolidated foreign currency balance sheet,prepared in its principal currencies, including its share of the assets andliabilities of its managed syndicates. It separately assesses the continuingeffectiveness of the hedge of its investment in Advent Re. Action is taken toreduce or mitigate foreign currency mismatches through the purchase or sale ofthe appropriate currencies. The Company does not use derivative instruments tomanage its net foreign currency position. The principal exchange rates used in translating foreign currency assets,liabilities, income and expenditure in the preparation of these accounts were: 2007 2006 Period Period Period Period average end average end rate rate rate rate US dollar 2.00 1.99 1.84 1.96Euro 1.46 1.36 1.47 1.48Canadian dollar 2.15 1.96 2.09 2.28 For the year ended 31 December 2007, the Company's gross premiums were writtenin the following currencies: 2007 2006 £m % £m % US dollar 95.3 75.1 84.5 73.2£ sterling 26.2 20.6 26.2 22.8Canadian dollar 5.4 4.3 4.7 4.0 126.9 100.0 115.4 100.0 At 31 December 2007, the Company's asset and liability positions in its majorforeign currencies were as follows: 31 December 2007 US$m £m CDN$m •m Total assets 402.8 141.4 18.5 12.4Total liabilities (384.9) (45.1) (13.2) (13.0) --------------- ------------- ------------- -------------Net assets (net liabilities) 17.9 96.3 5.3 (0.6) --------------- ------------- ------------- ------------- 31 December 2006 US$m £m CDN$m •m Total assets 467.5 109.4 20.2 12.3Total liabilities (434.7) (41.3) (9.9) (13.4) ------------ ---------- --------- ----------Net assets (net 32.8 68.1 10.3 (1.1)liabilities) ------------ ---------- --------- ---------- For the year ended 31 December 2007, the Company had foreign exchange gains andlosses which were recorded in the consolidated income statement as follows: 2007 2006 £'000 £'000Underwriting profit 937 6,991Corporate foreign exchange loss (69) (2,950) Net profit on exchange 868 4,041 The 2006 profit on exchange principally resulted from the impact of theweakening US dollar against sterling on the Company's share of Syndicate 780'sUS dollar net losses from the 2005 hurricanes, during the first half of 2006.In the third quarter of 2006, the Company sold sterling and bought US dollars toeliminate this mismatch position. The effect on profit before tax of a 5% increase or decrease in the closingexchange rates on the foreign currency balance sheet at 31 December 2007 isapproximately £0.5 million given the Company's policy of minimising foreigncurrency mismatches on a monthly basis. 2. OPERATING RESULTS 2007 2006 £'000 £'000Underwriting profitSyndicate 780 - Non-MarineUnderwriting Year of Account2007 - open 12,652 -2006 - open 2,281 20,3752005 - open (258) 1,5242004 and prior closed - (706)Total Syndicate 780 14,675 21,193 Syndicate 2 - MarineUnderwriting Year of Account2002 - run-off 91 992001 - run-off 1,370 (228)Total Syndicate 2 1,461 (129) Advent Re 4,944 - Company level reinsurance (168) - Underwriting profit 20,912 21,064 Managing AgencyAgency fees 237 301Recharges to Syndicates 246 753 483 1,054OtherInvestment result 13,141 12,681Interest expense (4,558) (3,560)Corporate costs (4,748) (5,436)Corporate foreign exchange loss (69) (2,950) Profit before tax 25,161 22,853 Underwriting expenses and Corporate costs included the following: 2007 2006 £'000 £'000 Acquisition costs 18,921 17,666Underwriting expenses 8,656 6,882Operating lease 133 118Depreciation of property and equipment 285 909 Audit servicesFees payable to the Company's auditor for theaudit of the Parent Company and consolidatedaccounts* 70 191*Non-audit servicesFees payable to the Company's auditor and itsAssociates for other services:The audit of the Company's subsidiaries 75 45Fees payable to the Company's auditor for theaudit of Managed syndicates 187 159 of which recharged to third party capital (71) (70) Tax services 28 22Valuation and actuarial services 184 175 of which recharged to third party capital (76) (87) Other services (review of interim financial 87 58statements) 484 493 * 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,including catastrophe-exposed business, with additional specialised linesincluding energy and marine excess of loss. The Company manages itsunderwriting activities on a line of business basis with the three segmentshaving the following insurance risk characteristics: a) Non-Marine Reinsurance consists of catastrophe and individual risk cover for insurance and reinsurance contracts written predominantly on a "losses occurring during policy period" basis with generally no risks in excess of 12 months and with a large proportion of risks expiring at 31 December each year. Non-Marine Reinsurance includes casualty which is written on an excess of loss basis with the emphasis on clash business. The majority of the account is written in the United States and provides cover for general casualty classes of auto liability, medical malpractice, workers compensation and associated exposures. No business is written on an unlimited basis. b) Property Insurance comprises mainly commercial property, personal lines and commercial automobile physical damage insurance written in the open market on both a lead and following basis, either through underwriting facilities or on an individual risk basis. Property Insurance includes the Personal Accident account which consists of a mix of personal accident, kidnap and ransom, sports disability and US medical business through binding authorities, line slips and reinsurance treaties. c) Marine includes marine excess of loss and offshore energy portfolios with coverage provided for both individual risk and catastrophe accumulations. The marine excess of loss section is written on a worldwide basis, providing reinsurance protections of insurance accounts for hull, cargo and energy. The energy portfolio consists of short tail offshore physical damage and operator's extra expense cover written on a facultative reinsurance and direct basis. Most risks are written on an excess or limited conditions basis with the objective of avoiding exposure to attritional losses. 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. Catastrophe Exposure Lloyd's defines its own set of Realistic Disaster Scenarios (RDS) events forwhich all syndicates must report their exposures. The Company's pre taxexposure, before and after reinsurance, to its major RDS scenarios at 1 January2008, including Advent Re, are set out below: Industry 1 January 2008 1 January 2008 1 January 2007 1 January 2007 Loss Gross loss Net loss Gross loss Net lossCatastrophe event US$Bn £M £M £M £M Gulf of Mexico Windstorm 113 83.7 38.1 64.2 19.3USA North East Windstorm 74 72.6 35.2 49.7 14.3Los Angeles Earthquake 74 69.1 32.6 31.2 3.1European Windstorm 31 66.1 34.6 57.1 25.2Japan Earthquake 51 32.4 26.6 12.6 9.9 The Gulf of Mexico catastrophe event, before consideration of Syndicate 780'scatastrophe margins, would result in an estimated after tax loss of £30.7million or 28.3% of shareholders' equity (2006: £19.3 million 15.6%respectively). At 1 January 2007, the syndicate had the benefit of certainOriginal Loss Warranty reinsurance protection which had expired over the periodto July 2007 and were not replaced. 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 2007,approximately 79% of gross premiums written came from the Company's existingclients (2006: 84%). 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 £21.0 million of gross premiums written for the year ended 31 December 2007(2006: £15.2 million), of which 46% (2006: 47%) was in respect of clients whichhave been with the Company for five or 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 the RDS as a guide to the amount of coverrequired and considers a number of other factors including reinsurance security,availability of reinsurers and retrocessional reinsurers, pricing, terms andconditions 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 expected tight market conditions for reinsurancecapacity, the Syndicate renewed its main reinsurance programmes as at 1 January2007 which involved the cancellation and replacement of certain reinsurancecontracts resulting in a write off of unearned reinsurance cost of approximately£1.5 million which was expensed at 31 December 2006. The Company's reinsurance costs as a percentage of gross written premiums forthe last four years is set out below: Ceded premiums 2007 2006 2005 2004 £m £m £m £m Gross Premiums Written (GPW) 126.9 115.4 100.5 80.1Ceded Reinsurance Premiums (20.7) (27.2) (37.6) (11.9) Net Premiums Written 106.2 88.2 62.9 68.2 Ceded Reinsurance Premiums as % 16.3% 23.6% 37.4% 14.9%of GPW 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 Limited Board. The objective is to ensurethat the outward placement of reinsurance is placed with reinsurers of anacceptable level of security. The core list of approved reinsurers currentlyconsists of 7 Lloyd's syndicates and 13 reinsurance companies all of which arerated A- or higher, or where policy limits are fully collateralised. 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 2008 reinsuranceprogramme, the Company's reinsurance exposure is provided by reinsurers rated asfollows: Exposure £'000ReinsurersA++ 3,600A+ 39,625A (companies) 53,000A (Lloyd's syndicates) 6,975A - 10,150Not rated - fully collaterised limits 47,500 Total exposure 160,850 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. REINSURANCE RECOVERABLE At 31 December 2007, the Company's reinsurance recoverable on outstanding claimsamounted to £18.2 million with reinsurers with the following risk ratings by AMBest (or equivalent S&P rating in the absence of an AM Best rating): Risk Rating £'000 % A+ 8,707 47.9Lloyd's 2,053 11.3A 3,278 18.0A- 310 1.7Trust fund backed 1,637 9.0BBB or below and Non Rated 2,191 12.1 Total 18,176 100.0 DEBTORS ARISING FROM INSURANCE AND REINSURANCE OPERATIONS The table below sets out the analysis of the debtors arising from insurance andreinsurance operations, at cost and fair value. 2007 2006 £'000 £'000 Insurance and reinsurance premiums due 9,183 6,775Reinsurance premium refund accruals 701 722Pipeline premium - Syndicate 780 20,614 18,829Pipeline premium - Syndicate 2 5,237 5,721Reinsurance recoveries on paid claims 4,853 7,412Deferred acquisition costs 7,472 5,862 48,060 45,321 Pipeline premium represents amounts receivable in respect of reinstatementpremiums on claims, together with the balance of premiums incepted on binderbusiness for which notification from the broker has not yet been received. Theestimate of the likely settlement date for pipeline premium due on reinstatementpremiums due is intrinsically related to the estimate of the likely settlementdates for the major losses. For Syndicate 2, as almost all of the pipelinepremium relates to the World Trade Center losses, this amount will probably becollected after more than one year. For Syndicate 780, almost all of thisbalance would be expected to be recovered within one year. The reinsurance recoveries accruals on paid claims is further analysed below: Syndicate 780 Syndicate 2 Total £'000 £'000 £'000Fully performing 446 867 1,313Past due 28 903 931Impaired 2,947 6,476 9,423Provision for uncollectible reinsurance (2,172) (4,642) (6,814) Net 1,249 3,604 4,853 Of the remaining debtor balances, it is expected that substantially all of theinsurance and reinsurance premiums due, the reinsurance premium refund accrualsand 90% of the deferred acquisition costs will be received or expensed withinone year. Other than reinsurance recoveries as noted above all of these debtorsare fully performing. UNDERWRITING YEAR OF ACCOUNT RESULTS The underwriting results of Advent Re are included in the Non-Marine Reinsurancesegment from 1 January 2007, the date it commenced writing business.Acquisition costs consisting of direct brokerage commissions, are allocated toeach segment on a direct basis while operating costs, including underwritingcosts, are allocated based on gross premiums written. The Company does notprepare a segmented balance sheet by line of business and accordingly, haspresented key insurance account balances only. INSURANCE SEGMENT RESULTS Non-Marine Property Re-insurance Insurance Marine Synd 2 Group Total £'000 £'000 £'000 £'000 £'000 £'0002007Gross premiums written 75,966 31,723 18,691 532 126,912 Net premiums written 61,292 27,785 16,461 661 106,199 Net premiums earned 57,862 24,358 13,103 661 95,984Net claims incurred (28,645) (14,499) (6,497) 1,208 (48,433)Acquisition costs (8,495) (7,431) (2,915) (80) (18,921)Underwriting expenses (4,899) (2,046) (1,204) (506) (8,655)Profit on exchange 456 191 112 178 937 Underwriting profit 16,279 573 2,599 1,461 20,912 Combined ratio 71.9% 97.6% 80.2% (120.9%) 78.2% Balance sheet accountsReinsurers' share of 7,545 1,109 785 8,737 18,176outstanding claimsReinsurers' share of unearned 437 551 70 - 1,058premiumsDeferred acquisition costs 1,458 4,501 1,513 - 7,472Other assets - - - - 335,263 335,263 Total assets 9,440 6,161 2,368 8,737 335,263 361,969 Outstanding claims (71,904) (20,583) (26,344) (44,933) (163,764)Unearned premiums (8,564) (16,160) (6,412) - (31,136)Other liabilities - - - - (58,671) (58,671) Total liabilities (80,468) (36,743) (32,756) (44,933) (58,671) (253,571) Non-Marine Property Re-insurance Insurance Marine Synd 2 Group Total £'000 £'000 £'000 £'000 £'000 £'0002006Gross premiums written 73,136 27,646 14,129 445 115,356 Net premiums written 52,632 23,835 11,205 529 88,201 Net premiums earned 54,899 16,888 9,378 529 81,694 Net claims incurred (25,472) (9,471) (7,857) (273) (43,073)Acquisition costs (9,304) (5,990) (2,365) (7) (17,666)Underwriting expenses (3,924) (1,483) (758) (717) (6,882)Profit on exchange 4,234 1,600 818 339 6,991 Underwriting profit (loss) 20,433 1,544 (784) (129) 21,064 Combined ratio 62.7% 90.9% 108.4% 124.3% 74.1% Balance sheet accountsReinsurers' share of 16,234 1,311 4,688 11,084 33,317outstanding claimsReinsurers' share of unearned 3,719 550 188 - 4,457premiumsDeferred acquisition costs 1,262 3,552 682 - 5,496Other assets - - - - 323,008 323,008 Total assets 21,215 5,413 5,558 11,084 323,008 366,278 Outstanding claims (97,752) (13,745) (29,494) (52,110) (193,101)Unearned premiums (7,476) (13,425) (3,421) - (24,322)Other liabilities - - - - (59,869) (59,869) Total liabilities (105,228) (27,170) (32,915) (52,110) (59,869) (277,292) Prior to 2007, all premiums were written in the United Kingdom through Syndicate780 and Syndicate 2. In 2007, gross and net premiums of £6.2 million werewritten by Advent Re in Bermuda, with the remainder written in the UnitedKingdom. The net assets of Advent Re are located in Bermuda and amount to £24.7 million(US$49.4 million) at 31 December 2007. All other assets are located in theUnited Kingdom. OUTSTANDING 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,such as casualty, will typically display greater variations between initialestimates and final outcomes because of the greater degree of difficulty ofestimating these reserves. Classes where claims are typically reportedrelatively quickly after the claim event tend to display lower levels ofvolatility. In calculating the estimated cost of unpaid claims the Company usesa variety of estimation techniques, generally based upon statistical analyses ofhistorical experience, which assumes that the development pattern of the currentclaims will be consistent 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 collectability. 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 and Advent Re are reviewed byexternal actuaries who issue valuation opinions on the adequacy of reserves. The movement in the Company's claims reserves for the year ended 31 December2007 is set out below: Provision for Claims Total unearned premiums outstanding £'000 £'000 £'000GrossAt 1 January 2007 24,322 193,101 217,423Exchange adjustments (1,814) (1,814)Movements in provisions - Current year 6,814 50,523 57,337 - Prior year (2,691) (2,691) - Paid claims (75,355) (75,355) At 31 December 2007 31,136 163,764 194,900 Reinsurers' shareAt 1 January 2007 4,457 33,317 37,774Exchange adjustments (512) (512)Movements in provisions - Current year (3,399) 1,646 (1,753) - Prior year (2,263) (2,263) - Paid recoveries (14,012) (14,012) At 31 December 2007 1,058 18,176 19,234 GrossAt 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 NetAt 31 December 2007 30,078 145,588 175,166 At 31 December 2006 19,865 159,784 179,649 For the year ended 31 December 2007, improvement in prior years' development onclaims, net of reinstatement premiums and reinsurance recoveries, amounted to£1.1 million (2006: £7.3 million). The claims balance is further analysed between notified outstanding claims andIBNR outstanding below: 2007 2006 Gross Net Gross Net £'000 £'000 £'000 £'000 Notified outstanding claims 116,654 101,901 143,184 114,654IBNR 47,110 43,687 49,917 45,130 Outstanding claims 163,764 145,588 193,101 159,784 Percentage of IBNR to notifiedoutstanding claims 40% 43% 35% 39% The breakdown of the gross and net claims reserves by category of claims is setout below. 2007 2006 Gross Net Gross Net £'000 £'000 £'000 £'000 Large catastrophe provisions 33,970 27,735 66,308 44,800All other short tail provisions 60,221 57,017 50,372 49,647Long-tail casualty provisions 24,640 24,640 24,311 24,311Syndicate 2 provisions 44,933 36,196 52,110 41,026 Total 163,764 145,588 193,101 159,784 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 £27.4 million and £23.4 million respectively (2006:£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 2007 exchange rates for all accident years. Ultimate gross claims Accident year 2001 2002 2003 2004 2005 2006 2007 Total and prior £'m £'m £'m £'m £'m £'m £'m £'m At the end of 1,086 137 83 145 339 35 53accident year One year later 1,139 108 67 189 380 35 Two years later 1,152 104 58 190 385 Three years later 1,145 103 59 188 Four years later 1,145 99 58 Five years later 1,148 97 Six years later 1,143 Estimate ofcumulative claims 1,143 97 58 188 385 35 53 1,959 Cumulativepaid claims (1,668) Less third partyparticipations onsyndicates (129) Gross claims 162liability * Favourable(unfavourable)development (57) 40 25 (43) (46) 0 (81) * Gross Claims reserves per balance sheet of £164 million includes additionalclaims handling and offset adjustments of £2 million. Ultimate net claims Accident year 2001 2002 2003 2004 2005 2006 2007 Total and prior £'m £'m £'m £'m £'m £'m £'m £'m At the end of 668 116 82 109 208 35 52accident year One year later 724 96 65 137 229 35 Two years later 737 94 56 141 235 Three years later 739 93 57 140 Four years later 747 92 56 Five years later 748 89 Six years later 746 Estimate ofcumulative claims 746 89 56 140 235 35 52 1,353 Cumulativepaid claims (1,097) Less third partyparticipations onsyndicates (111) Net claims 145liability * Favourable(unfavourable)development (78) 27 26 (31) (27) 0 (83) * Net Claims reserves per balance sheet of £146 million include additionalclaims handling, bad debt and offset adjustments of £1 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. Reserve Sensitivity The potential uncertainty in outstanding claims has been estimated based on thevolatility seen in historical development patterns. This indicates that thereis about a 50% chance that the final outcome will lie within +/- £10m of theestimated reserve. This analysis assumes that the historical volatility,excluding major losses, is representative of future uncertainty in outstandingclaims. A significant part of the outstanding claims relate to major losses,such as the terrorist attacks in the United States on 11 September 2001. Thebasis on which these claims will be settled is still uncertain, and may beinfluenced by future legal proceedings, which adds to the uncertainty in thesereserve estimates. The projected payout of the ultimate gross and net claims reserves at 31December 2007 is as follows: Payment within 1 year 2 years 3 years 4 years 5 years More than 5 years £'m £'m £'m £'m £'m £'m Gross 55 27 17 11 8 46Net 48 24 15 10 7 42 The payout patterns have been estimated based on the historical paymentpatterns. Future payment patterns are uncertain, particularly for claimsrelated to the terrorist attacks in the United States on 11 September 2001. Unearned premiums are expected to be earned 90% in 2008 and the balance in 2009. 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 EURIBOR 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 2007, 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: - 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, asset or mortgage backed securitiesor securities of government agencies which do not benefit from a full governmentguarantee except for the syndicates' overseas deposits managed by Lloyd's. 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$50 million bank facility at syndicate level,maturing 30 April 2008 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 are collected. Given the short term nature of the Company's cash and investments, it is notexposed to significant interest rate risk since maturing short term investmentsare repriced at market interest rates on an ongoing basis. The impact of a 100basis point increase or decrease in interest rates on the value of theinvestments is approximately £0.6 million before tax at 31 December 2007. INVESTMENT RESULT 2007 2006 £'000 £'000Investment IncomeInterest 12,515 12,092Gain on sale of investments 325 504Unrealised gains on investments 772 517 13,612 13,113 Investment expenses and chargesInvestment management expenses (114) (105)Loss on sale of investments (350) (281)Unrealised losses on investments (7) (46) (471) (432) Investment result 13,141 12,681 FINANCIAL INVESTMENTS 2007 2006 £'000 £'000Carrying value Debt securities and other fixed income securities- government and government guaranteed 219,654 75,930- corporate and other - 2,908Holdings in collective investment schemes 16,118 19,354Syndicates' overseas deposits 4,054 3,539 239,826 101,731 Cost Debt securities and other fixed income securities- government and government guaranteed 218,821 75,490- corporate and other - 2,976Holdings in collective investment schemes 16,118 19,354Syndicates' overseas deposits 4,054 3,539 238,993 101,359 All debt securities and other fixed income securities are listed on recognisedstock exchanges. Following the receipt of additional information on the underlying assets held bythe Syndicates' collective investment schemes and overseas deposits at Lloyd's,the Company reclassified these balances from cash and cash equivalents toinvestments including the comparative balances as at 31 December 2006. At 31 December 2007, Syndicate investments of £44.8 million (2006: £53.9million) were held in US situs and other regulatory deposits available for thepayment of claims in those jurisdictions and which are not available for thepayment of other claims and obligations. At 31 December 2007, Advent Re had pledged cash and investments of £23.0 millionas security for policy limits of contracts written. The syndicates' overseas deposits (Joint Asset Trust Funds (JATF)) are managedby Lloyd's. The Company does not have the authority to ensure that itsinvestment policies are complied with. Lloyd's has advised the Company that ithas invested the JATF in: Company's share £'000 Government securities 2,509Mortgage backed securities (MBS) 23Callable bonds 173Corporate bonds rated AAA 295 AA 577 A 343 BBB 1Asset backed securities (ABS) 128Cash 5 4,054 Other than the above investments over which the Company does not exerciseinvestment authority, the Company only invests in short term government andgovernment guaranteed securities. It does not invest in derivatives, MBS, ABS,equities or corporate bonds given current market conditions. CASH AND CASH EQUIVALENTS 2007 2006 £'000 £'000 Corporate cash at bank 10,760 5,541Syndicates' cash at bank 5,448 1,841Advent Re cash at bank 2,147 19,132Deposits with credit institutions 7,995 1,599Corporate funds held by Lloyd's 628 113,541 26,978 141,654 During the quarter ended 30 September 2007, the Company converted its corporatefunds held by Lloyd's (FAL) from Lloyd's-managed pooled money market funds intoshort term government and government guaranteed investments. At 31 December 2007, the cash at bank was held with Royal Bank of Scotland andBarclays Bank, both of which are rated AA by Standard & Poor's. OTHER RECEIVABLES 2007 2006 £'000 £'000Other receivables at cost and fair valuecomprise- prepayments 221 359- accrued income 1,549 2,986- Other debtors 958 1,749- Syndicate third party names 1,617 4,426 4,345 9,520 All balances are due within 12 months. At 31 December 2007, no single entity accounted for 5% or more of the aggregateamount of other debtors. 5. 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 volatility of its results due to majorcatastrophe events. 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 denominatedsubordinated debt due 3 June 2035, amounting to an aggregate of £25.1 million at31 December 2007, the Company has the ability to defer interest payable on thesubordinated notes for 20 consecutive quarters without causing an event ofdefault. The Company seeks to maintain its ratio of long term debt to totalcapital at less than 35% with the objective of reducing that ratio over the nextfive years through accumulated earnings or as the expiry of the "no call"provisions on its debt provide it with an ability to refinance or repay itssenior loan notes. For the Company's operations at Lloyd's, the capital required to support acorporate member's underwriting on a syndicate is determined by Lloyd's. TheLloyd's capital framework for setting member capital requirements is based onsyndicates' individual capital assessments and taking into account the overalleconomic capital requirements of the market/franchise after allowing for thebenefits provided by the Lloyd's rating and the Central Fund support. The 2008business plan of Syndicate 780 has been approved by Lloyd's. Lloyd's haveadvised the Company that its 2008 Economic Capital Requirement (ECR) is 73% ofcapacity (2007: ECR 67%) reflecting an expected softening in insuranceconditions. The syndicate has the ability to pay out interim profits on itscurrent years of account to its members which provides more immediate availablecapital to support ongoing underwriting activities for future years of account. The Company deposits Funds held by Lloyd's (FAL) with the Corporation of Lloyd's(Lloyd's) to support the Company's underwriting activities. The Company isparty to a Lloyd's deposit trust deed which gives Lloyd's the right to applythese monies in settlement of any claims arising from the Company's underwritingat Lloyd's. At 31 December 2007, the Company's FAL amounted to £99.8 million, ofwhich £84.7 million was held in support of ongoing underwriting activities forthe 2008 year of account and £15.1 million was held to pay net outstandinglosses on 2005 and prior years of account. The Company has also usedundistributed profit from its 2006 year of account of £13.2 million to supportthe 2008 year of account. In addition to the Company's FAL, a major shareholder, Fairfax FinancialHoldings Limited (Fairfax), has deposited FAL of £56.6 million at 31 December2007 to support the Company's underwriting for the 2001 to 2005 underwritingyears pursuant to a Funding Agreement dated 16 November 2000. Any underwritingprofits arising from the use of the Fairfax FAL are receivable by the Companywhich is also responsible for the payment of any losses arising. During 2007, Lloyd's released £9.8 million of Fairfax FAL concurrent with theclosure of Syndicate 780's 2004 year of account. In 2006, the company deposited£39.5 million and $11.4 million in FAL, thereby reducing the Fairfax FAL by thesame amount. When Syndicate 780's 2005 year of account is closed on 30 June 2008, theCompany's share of the cash call of £29.5 million will be paid from its existingFAL of £15.1 million and from holding company cash or the release of interimprofits at 31 December 2007 from the 2006 and 2007 years of account. The FAL and the overseas deposits are not available for use by the Company forordinary cash flow purposes. SHARE CAPITAL Authorised Allotted, Called Up and Fully Paid 2007 2006 2007 2006 £'000 £'000 £'000 £'000 Ordinary shares of 5p each 50,000 50,000 20,329 20,329 Number of shares ('000s)At 1 January 1,000,000 331,109 406,570 219,608 Share capital increase - 668,891Share issues - 186,962 1,000,000 1,000,000 406,570 406,570 Share issues On 12 December 2006, the Company issued 36,960,860 New Ordinary Shares of 5pence each at 26 pence per share for cash proceeds of £9.6 million less expensesof £0.6 million, of which £1.8 million has been included in called up sharecapital and £7.2 million has been included in the share premium account. On 6 January 2006, the Company issued 150,000,000 New Ordinary Shares of 5 penceeach at 20 pence per share for cash proceeds of £30 million less expenses ofissue of £0.7 million of which £7.5 million has been included in called-up sharecapital and £21.8 million has been included in the share premium account. At thesame time, the authorised number of shares was increased from 331,109,320 to1,000,000,000 shares. Share Option Schemes The Company has established two share option plans: the Unapproved Plan whichwas adopted by the Board of Directors on 20 April 2005; and the Approved Planwhich was adopted by the Board of Directors on 29 March 2005 (collectivelyreferred to as the "Advent Share Option Plans"). The Advent Share Option Planshave been set up to enable employees and Directors of the Company to be grantedoptions to acquire Ordinary Shares of the Company ("Options"). Pursuant to a Placing Agreement dated 3 June 2005, the Company granted to NumisSecurities Limited an option to subscribe for up to 2,196,087 Ordinary Shares at35p per share, exercisable at any time, in whole or in part, up to 3 June 2010. On 3 June 2005, options over an aggregate of 4,629,000 Ordinary Shares wereawarded to directors and employees, pursuant to the Advent Share Option Plans.These awards have been granted at the placing price of 35p per share and are notsubject to performance conditions. The Approved Scheme options have an exerciseperiod between three and ten years from the date of grant of 3 June 2005,whereas the Unapproved Scheme options have an exercise period between one andten years following the date of grant. On 28 April 2006, options over an aggregate of 5,850,000 shares, exercisable at20p (which was the Placing Price of the private placement undertaken at the samedate that shareholder approval was granted for issue of the options followingpublication of the Company's 2005 Report and Accounts) were granted to directorsand employees. The options are not exercisable before 28 April 2009 and expire28 April 2016. Numis 2005 Approved 2005 Unapproved 2006 UnapprovedGrant Outstanding at 1 January 2006 2,196,087 2,323,996 2,305,004 - Granted in year - - - 5,850,000Forfeited in year - (366,428) (178,572) (250,000) Outstanding at 31 December 2006 2,196,087 1,957,568 2,126,432 5,600,000 Exercisable at 31 December 2006 2,196,087 - 2,126,432 - Outstanding at 31 December 2007 2,196,087 1,957,568 2,126,432 5,600,000 Exercisable at 31 December 2007 2,196,087 - 2,126,432 - In accordance with IFRS 2, a charge has been made to the consolidated incomestatement for the share options in issue. The charge is broken down between thevarious option grants as follows: Description Exercise Normal exercise Charge for Reserve at 31 Charge Reserve at price period the year December 2006 for the 31 December year 2007 2006 2007 £'000 £'000 £'000 £'000 2005 grant 35.0 pence Jun 2008 - Jun 2015 7 12 8 202005 grant 35.0 pence Jun 2006 - Jun 2015 10 27 - 27Numis options 35.0 pence Jun 2005 - Jun 2010 - 30 - 302006 grant 20.0 pence May 2009 - May 2016 126 126 212 338 143 195 220 415 A "Black Scholes" option pricing model has been used to calculate the fair valueof the options with the following key assumptions used for the options grantedin each year: 2006 2005 Weighted average share price 32.6p 35pWeighted average exercise price 27.9p 35pExpected volatility 13.1% 13.1%Expected life 4.5 - 8.0 years 4.5 - 7.0 yearsRisk free rate of return 4.6% - 4.7% 4.7%Expected dividend yield 0.0% - 8.0% 8.0% The volatility of the Company's share price is measured by reference to thestandard deviation of the daily share price and the risk free rate of return isconsistent with government bond yields. Due to the small pool of recipients, noassumption is made for staff turnover in the calculations. Adjustments are madefor leavers during the vesting period of the option. EARNINGS PER ORDINARY SHARE Earnings per share is based on the profit attributable to shareholders and theweighted average number of shares in issue during the year. 2007 2006 £'000 £'000 Profit for the year 19,192 16,011 Weighted average number of shares in issue (' 406,570 369,579000s) Basic earnings per share 4.7p 4.3p Dilutive shares 402 2,507 Adjusted average number of share in issue 406,972 372,086 Diluted earnings per share 4.7p 4.3p LONG TERM DEBT Outstanding Issue date Due date Callable Interest rate Interest 2007 2006 debt (by the rate (31 Company) December £'000 £'000 after 2007) Subordinated NotesUS$34 3/6/2005 3/6/2035 3/6/2010 3 month LIBOR + 3.90% 8.60% 16,546 16,821million€12 million 3/6/2005 3/6/2035 3/6/2010 3 month EURIBOR + 3.85% 8.53% 8,539 7,854 25,085 24,675Senior NotesUS$26 16/1/2006 15/1/2026 16/1/2011 3 month LIBOR + 4.50% 9.20% 12,540 12,742millionUS$20 15/12/2006 15/12/2026 15/12/2011 3 month LIBOR + 4.15% 8.85% 9,722 9,865million 22,262 22,607Total Loan Notes at amortised cost and fair 47,347 47,282valueWeighted average interest rate, 31 December 8.80% 9.19% The Subordinated Notes rank on a winding-up of the Company in priority todistributions on all classes of share capital and rank pari passu with eachother but are subordinated in right of payment to the claims of allunsubordinated creditors of the Company (including, where applicable, allpolicyholders of the Syndicate). The Senior Notes rank on a winding-up of the Company in priority todistributions on all classes of share capital and subordinated loan notes, andrank pari passu with each other but are subordinated in right of payment to theclaims of all unsubordinated creditors of the Company (including, whereapplicable, all policyholders of the Syndicate). The Subordinated Notes and Senior Notes are listed on the Channel Islands StockExchange. 6. INCOME TAXES 2007 2006 £'000 £'000Charge in period Current tax:UK corporation tax on profit for the year - -Adjustments in respect of previous year (20) -Foreign tax - (718) Total current tax (20) (718) Deferred Tax:Origination and reversal of timing differences 5,989 7,560 Tax on profit on ordinary activities 5,969 6,842 Factors affecting tax charge for the year Profit on ordinary activities before tax 25,161 22,853 Tax charge at standard rate of UK corporation tax of 30% (2006 - 7,548 6,85630%) Effects of: Zero rate of tax applied to Advent Re's profits (1,793) -Effect of change in tax rate - deferred tax brought forward 1,423 -Effect of change in tax rate - current year change (503) -Adjustments from tax return as filed (893) -Other differences 187 (14) 5,969 6,842 Factors that may affect future tax charges Deferred tax is provided on the annually accounted result of each year ofaccount. A deferred tax asset of £15.6 million (2006: £21.6 million) has beenrecognised on annually accounted results. During 2007, the UK government: a) Repealed section 107 on the disclaimer of reserves with transitional rules that allow a final disclaimer of reserves for the year ended 31 December 2007, and which is capped at 10% of the net technical reserves at that date. b) Made legislative changes to Lloyd's specific tax rules to ensure that trading losses transfer between companies under common control. As a result, Advent Capital Limited's trading losses resulting from the closure of the 2005 and prior years of account are transferable to Advent Capital (No. 3) Limited and will be available for offset against its own future trading profits from the 2006 and subsequent years of account. c) Reduced the corporate tax rate from 30% to 28% resulting in a £1.4 million tax charge in the second quarter of 2007. The Company is subject to US tax on its share of syndicate deemed USunderwriting profits. This tax is recoverable to the extent that UK tax ariseson taxable syndicate profits for the appropriate years of account. TheCompany's expects to suffer US tax on its share of syndicate deemed USunderwriting profits. Provision has been made for the Company's liability to UStax. Some US tax suffered will be irrecoverable due to the difference betweenUK and US tax rates and the difference between the timing of US and UK syndicateprofits for tax purposes. No US tax has been written off during the year (2006:£nil). The Company's tax provision for the year ended 31 December 2007 has beencalculated on the basis that Advent Re is a non-UK resident corporation for UKtax purposes. As a result, there is no tax provision on Advent Re's profits inthese accounts. A deferred tax liability has not been provided on theundistributed profit of £6.0 million as the parent company does not intend todistribute these profits in the foreseeable future. DEFERRED TAX 2007 2006 £'000 £'000 Deferred tax asset in respect of technicalprovisions disclaimed: - 3,757 Deferred tax asset (liability) in respect ofunderwriting results to be declared: Underwriting Year of Account 2001 (718) (265) 2002 (115) (126) 2004 - 5,821 2005 17,060 18,845 2006 (7,232) (6,602) 2007 (3,418) - Deferred tax liability in respect of: Losses carried forward to future periods 9,737 - Capital allowances disclaimed 244 - Other timing differences 107 224 15,665 21,654 Deferred tax asset at 1 January 2007 21,654 29,214 Deferred tax charge in the income statement (5,989) (7,560) Deferred tax asset at 31 December 2007 15,665 21,654 As required by IAS 12 Income Taxes, the Directors have recognised a deferred taxasset in respect of underwriting losses as they regard it as probable that therewill be suitable future profits available to utilise these losses. Therecoverability of the deferred tax asset is reviewed annually and its carryingvalue adjusted as appropriate. 7. INTANGIBLE ASSETS Goodwill Purchased Purchased on Acquisition Capacity - Capacity - Total finite life indefinite life £'000 £'000 £'000 £'000 At 1 January 2006 4,148 - 1,196 5,344Additions - 1,219 1,499 2,718 At 31 December 2006 4,148 1,219 2,695 8,062 At 1 January 2007 4,148 1,219 2,695 8,062Amortisation of consideration (852) (852)payable in 2008 (see below) At 31 December 2007 4,148 367 2,695 7,210 The consideration payable of £1.2 million to third party capital providers on 30June 2008 is a finite life asset which is being amortised to corporate costsover the 2007 year of account to which it relates and is expected to be fullyamortised by 31 December 2009. 8. TRADE AND OTHER PAYABLES 2007 2006 £'000 £'000 Trade and other payables at cost and fair value- Accruals 3,184 4,006- Deferred income 1,379 126- Other 319 1,657 4,882 5,789Categorised as due- within 12 months 4,843 5,789- after more than 12 months 39 - 4,882 5,789 9. ASSETS AND LIABILITIES HELD BY SYNDICATE The consolidated balance sheet includes the following assets and liabilitiesheld by the syndicates on which the Company participates. These assets aresubject to Lloyd's trust deeds for the benefit of policyholders. 2007 2006 £'000 £'000AssetsCash and cash equivalents 33,616 26,332Financial investments 96,169 78,838Other receivables 2,147 5,275Insurance and reinsurance assets - Reinsurers' share of outstanding claims 18,176 33,317 - Reinsurers' share of unearned premiums 1,058 4,457- Debtors arising from insurance and reinsurance operations 48,060 45,321 199,226 193,540LiabilitiesInsurance and reinsurance liabilities - Outstanding claims 163,764 193,101 - Unearned premiums 30,823 24,322 - Creditors arising out of insurance and reinsurance operations 6,442 6,798Trade and other payables 613 1,231 201,642 225,452 10. COMMITMENTS (a) Capital commitments There were no capital commitments or authorised but un-contracted commitments atthe end of the financial year. (b) Funds at Lloyd's As detailed further in Note 5, the Company has committed funds to support itsunderwriting business at Lloyd's in the form of investments managed by CreditAgricole Asset Management, a fund manager. These assets are not available tomeet day to day cash flow requirements of the Company. (c) Operating leases The Company leases certain land and buildings on short-term operating leases,the future minimum lease payments under non-cancellable operating leases are asfollows: 2007 2006 £'000 £'000 No later than one year 320,644 320,644Later than one year and no later than 5 years 213,763 534,407 11. RELATED PARTIES Accommodation costs, at an arm lengths price of £20,870 (2006: £20,120) for theWickford office were paid to Charlbury Investments Limited in accordance withthe terms of the lease. B.F. Caudle is a director of Charlbury InvestmentsLimited. Syndicate 780 accepted inwards reinsurance business from and placed outwardsreinsurance business with, companies that are deemed to be related parties ofthe Company by virtue of the shareholding of Fairfax and certain of itssubsidiaries. The Company's share of premiums ceded by Syndicate 780 to relatedparties under quota share arrangements was £111,709 (2006: £3,986,288). TheCompany's share of reinsurance recoveries from related parties under quota sharearrangements was £678,440 (2006: £1,006,748). All transactions with theseparties were conducted at arms length and at normal commercial terms. As disclosed in Note 5, Fairfax has deposited Funds at Lloyd's to support theCompany's underwriting. Advent Capital (Holdings) PLC carries out transactions with its subsidiaries ona regular basis through intercompany accounts to minimize the need for cash tobe held in those subsidiaries. These transactions fall into the followingcategories: 2007 2006 £'000 £'000 Receipt of underwriting profit distributions 10,740 -Net funding of FAL requirements (5,954) -Payments for goods and services (869) (940)Receipts for services provided 70 161Receipt of FAL investment income 7,906 2,437 The table below sets out the intercompany receivables and payables due from orto each subsidiary entity at the balance sheet date. 2007 2006 £'000 £'000 Advent Underwriting Limited (577) (937)Advent Group Services Limited 247 186Advent (Strategic Investments) Limited 3,290 21,290Advent Capital Limited 89,173 77,653Advent Capital (No 2) Limited (1,745) (6,414)Advent Capital (No 3) Limited 71,318 82,200Advent Re Limited 37 - 12. RECONCILIATION OF PROFIT BEFORE TAX TO CASH FLOWS FROM OPERATING ACTIVITIES 2007 2006 £'000 £'000 Profit before tax 25,161 22,853Movement in:- insurance and reinsurance receivables 15,801 81,557- other receivables 3,738 5,148- insurance and reinsurance payables (22,879) (141,114)- trade and other payables (1,014) 1,856Interest expense 4,558 3,560Investment result (6,489) (6,747)Unrealised investment gains (losses) 765 (470)Net (purchase) sale of investments (138,861) 7,763Depreciation 284 909Amortisation of debt issue costs 22 69Amortisation of capacity 852 -Amortisation of share option costs 220 143Foreign exchange movements on financing 43 (4,374) (117,799) (28,847) Advent Group Services Limited, a wholly owned subsidiary, purchases goods andservices on behalf of the Company, its subsidiaries and Managed Syndicates. 13. STAFF COSTS (including Directors) 2007 2006 £'000 £'000 Wages and salaries 5,891 6,972Social security costs 615 567Other pension costs 557 562 7,063 8,101Recharged to third party capital (1,075) (1,494) 5,988 6,607 Other pension costs are in respect of money purchase schemes and personalpension arrangements. Outstanding contributions at 31 December 2007 were£38,988 (2006: £35,108). The average number of persons, including executive directors, employed by theCompany during the year was: 2007 2006 Management 4 4Finance and actuarial 8 8Underwriting 16 14Claims and Reinsurance 6 6Compliance 3 3IT 5 5Administration 4 5 46 45 14. DIRECTORS' EMOLUMENTS 2007 2006 £'000 £'000 Aggregate emoluments 1,555 1,980Fees 121 108Fees payable to third parties - 45Contribution to money purchase pension schemes 57 94 1,733 2,227Recharged to third party capital (56) (197) 1,677 2,030 Number of Directors with accrued benefits undermoney purchase scheme 2 2 Highest paid Director Emoluments (including benefits in kind) 695 659Contribution to money purchase pension schemes 10 6 705 665Recharged to third party capital - - 705 665 Refer to the Directors' Remuneration Report for further information on theremuneration of key executives and directors. 15. RECONCILIATION OF BALANCE SHEET AND INCOME STATEMENTS PREPARED UNDER IFRS TO THOSE PREVIOUSLY PREPARED UNDER UK GAAP The table below sets out the changes to the reported profit for the year ended31 December 2006 and a reconciliation of the balance sheet at 31 December 2006.There is no change to reserves at 31 December 2005. Reported Adjustment for Adjustment to Reported under UK GAAP intangible recoverable under IFRS asset amount amortisation £'000 £'000 £'000 £'000 Profit after tax 15,352 1,656 (997) 16,011Purchased capacity - indefinite life 3,773 1,138 (997) 3,914Goodwill 3,630 518 - 4,148Total assets 365,619 1,656 (997) 366,278Total shareholders' equity 88,327 1,656 (997) 88,986Total liabilities and shareholders' 365,619 1,656 (997) 366,278equity Goodwill The Company's financial statements include the assets, liabilities and resultsof the Parent Company and its subsidiaries at 31 December using the acquisitionaccounting basis except where merger accounting is appropriate. Under IFRS 3 -Business Combinations, merger accounting is not an appropriate method to accountfor a business combination. However, as permitted on the first time adoption ofIFRS, the Company has chosen not to restate the historical merger basis ofconsolidation for Advent Underwriting to an acquisition basis as the transactionoccurred prior to 31 March 2004. Any subsequent business combinations will beaccounted for using the acquisition method. In accordance with IFRS, the book value of goodwill at the date of transition toIFRS has been used as fair value. Purchased capacity - indefinite life In adopting IAS 38, the Company reinstated accumulated amortisation to 1 January2006 to carrying value of purchased capacity. In the absence of a liquid marketfor the syndicate's capacity, the fair value of the purchased capacity at thedate of transition to IFRS was determined by the price paid for the remainingthird party capacity in September 2006, resulting in an impairment charge of£997,000. Cash and cash equivalents Certain investments, meeting the definition of cash and equivalents, werereclassified from financial investments to cash and cash equivalents on thebalance sheet with no change in total assets. For the Parent Company only statements, there are no material adjustments to theopening balance sheet as reported under UK GAAP, other than the form ofpresentation. PARENT COMPANY ONLY BALANCE SHEETAt 31 December 2007 Note 2007 2006 £'000 £'000AssetsCash and cash equivalents 16 9,719 4,640Other receivables - Due from subsidiaries 164,092 181,366 - Other 2,310 281Investments in subsidiaries 18 33,560 33,560 Total assets 209,681 219,847 Shareholders' EquityOrdinary share capital 5 20,329 20,329Share premium account 60,662 60,662Capital redemption reserve 21,065 21,065Other reserves 415 195Retained earnings 56,706 61,631 Total shareholders' equity 159,177 163,882 LiabilitiesTrade and other payables 17 836 1,332Due to subsidiaries 2,321 7,351Long term debt 5 47,347 47,282 Total liabilities 50,504 55,965 Total shareholders' equity and liabilities 209,681 219,847 The notes form an integral part of these financial statements. The parent company only financial statements were approved by the Board on 21February 2008 and signed on its behalf by: Brian F Caudle Trevor J AmbridgeChairman Chief Financial Officer PARENT COMPANY ONLY STATEMENT OF CHANGES IN EQUITYYear ended 31 December 2007 Capital 31 December Share Share redemption Other Retained 2006 capital premium reserve reserves earnings Total £'000 £'000 £'000 £'000 £'000 £'000 Balance, at 1 January 2006 10,981 31,759 21,065 52 62,441 126,298 Loss for the year - - - - (810) (810) Proceeds from issue ofshares (Note 5) 9,348 28,903 - - - 38,251 Share based payments - - - 143 - 143 Balance, at 31 December 20,329 60,662 21,065 195 61,631 163,8822006 Loss for the year - - - - (4,925) (4,925) Share based payments - - - 220 - 220 Balance, at 31 December 20,329 60,662 21,065 415 56,706 159,1772007 The loss for the year is the total recognised loss for the year. PARENT COMPANY ONLY CASH FLOW STATEMENTYear ended 31 December 2007 Note 2007 2006 £'000 £'000 Cash flows from operating activities 20 9,024 (121,249)Interest paid (4,563) (3,427)Net cash used in operating activities 4,461 (124,676) Cash flows from investing activitiesInterest received 618 1,526Investment in subsidiaries - (19,132)Cash flows from investing activities 618 (17,606) Cash flows from financing activitiesIssue of ordinary shares - 39,582Share issue expenses - (1,331)Issue of loan notes - 25,277Loan note issue expenses - (792)Cash flows from financing activities - 62,736 Net increase (decrease) in cash and cash equivalents 5,079 (79,546)Cash and cash equivalents at beginning of year 4,640 84,186Cash and cash equivalents at end of year 16 9,719 4,640 Accounting policies Basis of presentation Advent Capital (Holdings) PLC is the ultimate parent company for the AdventGroup. The Parent Company is domiciled in the United Kingdom. These Parent Company financial statements have been prepared in accordance withInternational Financial Reporting Standards (IFRS) and IFRIC interpretationsendorsed by the European Union (EU) and with those parts of the Companies Act1985 applicable to companies reporting under IFRS, using the historic costconvention with the revaluation of financial assets and financial liabilities atfair value through the consolidated income statement. As permitted undersection 230 of the Companies Act 1985, no separate income statement has beenprepared. The accounting policies used in the preparation of the consolidated financialstatements have been consistently applied in the preparation of these separateParent Company financial statements. In addition, the following policies havealso been used. Investment in Subsidiaries Investments in the Parent Company's subsidiaries are initially stated at costand are subsequently reviewed for impairment as circumstances indicate that thecarrying value exceeds the realisable value. Dividend income Dividend income from investments in subsidiaries is recognised when the right toreceive payment has been established. First time adoption of IFRS There were no adjustments to the Parent Company financial statements on theadoption of IFRS, other than in presentation. 16. CASH AND CASH EQUIVALENTS 2007 2006 £'000 £'000 Cash at bank 9,719 4,640 17. TRADE AND OTHER PAYABLES 2007 2006 £'000 £'000 Parent CompanyInterest payable 285 290Accruals 551 1,042 Total at cost and fair value 836 1,332 18. INVESTMENT IN SUBSIDIARIES Subsidiary Undertakings £'000CostAt 1 January 2007 and 31 December 2007 33,560 The investment consists of 100% of the issued share capital of Advent (StrategicInvestments) Limited (ASIL) and Advent Re Holdings Limited. ASIL is registered in England and Wales. ASIL acts as an investment companyowning shares in the following companies: Company Shareholding Nature of Business Country of Registration Advent Underwriting Limited 100% Lloyd's Managing Agent England & WalesLonestar Capital 100% Intermediate Holding Company England & WalesAdvent Group Services Limited 100% Service Company England & WalesAdvent Capital Limited 100% Lloyd's Corporate Member England & WalesAdvent Capital (No. 2) Limited 100% Lloyd's Corporate Member England & WalesAdvent Capital (No. 3) Limited 100% Lloyd's Corporate Member England & Wales Lonestar Capital owns 100% of the shares in Sealdrive, a company registered inEngland & Wales. Both of these companies were placed in Members' VoluntaryLiquidation on 21 November 2007. On 21 December 2006, the Parent Company incorporated a Bermudan Class 3reinsurer, Advent Re, whose shares are owned by Advent Re Holdings Limited(Advent Re Holdco), an intermediary holding company. Advent Re Holdco is whollyowned by Advent Capital (Holdings) PLC. Advent Re and Advent Re Holdco are bothregistered in Bermuda. Amounts due to and from subsidiaries are non-interest bearing, have no fixedrepayment terms and are recorded at cost which approximates fair value. The Company has provided a letter of support to its subsidiary, Advent CapitalLimited. 19. PROFIT ATTRIBUTABLE TO MEMBERS OF PARENT COMPANY As permitted by section 230 of the Companies Act 1985, the Parent Company'sincome statement has not been included in the Company's Accounts. The Parent Company's loss for the year ended 31 December 2007 was £4,925,000(2006: loss £810,000). 20. RECONCILIATION OF LOSS BEFORE TAX TO CASH FLOWS FROM OPERATING ACTIVITIES 2007 2006 £'000 £'000 Loss before tax (6,933) (994)Movement in:- other receivables 17,223 (118,500)- trade and other payables (5,521) (1,492)Debt interest 4,558 3,560Investment income (588) (1,331)Net sale of investments - 1,672Amortisation of debt issue costs 22 69Amortisation of share option costs 220 143Foreign exchange movements on financing 43 (4,376) 9,024 (121,249) COMPANY SECRETARY AND ADVISORS COMPANY SECRETARY Giuseppe Perdoni ACA ACII REGISTERED OFFICE OF THE COMPANY 10th Floor 1 Minster Court Mincing Lane London EC3R 7AA REGISTERED NUMBER OF THE COMPANY 03033609 NOMINATED ADVISER AND BROKER Fox-Pitt, Kelton Cochran Caronia Waller 25 Copthall Avenue London EC2R 7BP AUDITORS PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors Hay's Galleria 1 Hay's Lane London SE1 2RD SOLICITORS Norton Rose LLP 3 More London Riverside London SE1 2AQ PRINCIPAL BANKERS The Royal Bank of Scotland 5-10 Great Tower Street London EC3P 3HX REGISTRARS Capita IRG Plc Northern House Woodsome Park Fenay Bridge Huddersfield HD8 0LA This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
ADV.L