23rd Feb 2007 07:02
Advent Capital (Holdings) PLC23 February 2007 PART 2 OF 2 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 denominated debt due3 June 2035, amounting to an aggregate of £23.7 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. 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 2007business plan of Syndicate 780 has been approved by Lloyd's. Lloyd's haveadvised the Company that the 2007 Economic Capital Requirement for Company isunchanged from 2006 at 67%. Commencing in 2007, the syndicate will have theability to pay out interim profits on its 2006 year of account to its memberswhich will provide more immediate available capital to support ongoingunderwriting 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 2006, the Company's FAL amounted to £113.5 million,of which £79.4 million was held in support of ongoing underwriting activitiesfor the 2006 years of account onwards and £34.1 million was held to pay netoutstanding losses on 2005 and prior years of account. In addition to the Company's FAL, a major shareholder, Fairfax FinancialHoldings Limited (Fairfax), has deposited Funds at Lloyd's of £65.5 million at31 December 2006 to support the Company's underwriting for the 2001 to 2005underwriting years pursuant to a Funding Agreement dated 16 November 2000. Anyunderwriting profits arising from the use of the Fairfax FAL are receivable bythe Company which is also responsible for the payment of any losses arising. During 2006, the Company deposited an additional £39.5 million and US$11.4million in FAL, including from the net proceeds of its debt and equity offeringscompleted in January 2006, as part of the process for providing for open yearlosses on the 2004 and 2005 years of account, thereby reducing Fairfax's FAL bythe same amount. On 30 June 2006, the Company paid its share of Syndicate780's cash call on the 2005 year of account of £36.9 million from its FALdeposited in January 2006. When syndicate 780's 2004 year of account is closed on 30 June 2007, theCompany's share of the cash call of £19.4 million will be paid from its existingFAL. SHARE CAPITAL Authorised Allotted, Called Up and Fully Paid 2006 2005 2006 2005 £'000 £'000 £'000 £'000 Ordinary shares of 5p each 50,000 16,555 20,329 10,981 Number of shares ('000s) 1,000,000 331,109 406,570 219,608 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. On 3 June 2005, the Company issued 114,285,714 New Ordinary Shares of 5 penceeach at 35 pence per share, pursuant to an equity offering fully underwritten byNumis Securities Limited (Numis) for cash proceeds of £40 million less expensesof issue of £2.53 million, of which £5.72 million has been included in called-upshare capital and £31.76 million has been included in the share premium incomeaccount. 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. 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"). 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. Grant Numis 2005 Approved 2005 Unapproved 2006 Unapproved 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 5,600,000Exercisable at 31 December 2006 2,196,087 - 2,126,432 - In accordance with FRS 20, a charge has been made to the profit and loss accountfor the share options in issue. The charge is broken down between the variousoption grants as follows: Description Exercise price Normal exercise period Reserve at 1 Charge for the Reserve at 31 January 2006 year December 2006 £'000 £'000 £'0002005 grant 35.0 pence Jun 2008 - Jun 2015 5 7 122005 grant 35.0 pence Jun 2006 - Jun 2015 17 10 27Numis options 35.0 pence Jun 2005 - Jun 2010 30 - 302006 grant 20.0 pence May 2009 - May 2016 - 126 126 52 143 195 A "Black Scholes" option pricing model has been used to calculate the fair valueof the options with the following key assumptions used: 2006 2005 Weighted average share price 32.64p 35pWeighted average exercise price 27.93p 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 period. 2006 2005 £'000 £'000 Profit (loss) for the period 15,352 (52,528) Weighted average number of shares in issue ('000s) 369,579 171,703 Basic earnings per share 4.2p (30.6)p Dilutive shares 2,507 - Adjusted average number of share in issue 372,086 171,703 Diluted earnings per share 4.1p (30.6p) LONG TERM DEBT 2006 2005 £'000 £'000 US$34 million due 3 June 2035 16,821 19,160Euro 12 million due 3 June 2035 7,854 7,944 Total subordinated notes 24,675 27,104 US$26 million due 15 January 2026 12,742 -US$20 million due 15 December 2026 9,865 -Total senior notes 22,607 - Total loan notes 47,282 27,104Weighted average interest rate 9.19% 7.82% On 3 June 2005, the Company raised US$34 million and Euro 12 million aggregateprincipal amount of unsecured subordinated notes (the "USD Subordinated Notes"and "Euro Subordinated Notes" respectively), due 3 June 2035 and callable by theCompany at any time, in whole or in part, after 3 June 2010. Expenses incurredin connection with the issue of the debt reduced net proceeds to £26.2 million. The notes bear interest at 3 month EURIBOR plus 3.85% for the Euro SubordinatedNotes (7.57% at 31 December 2006) and 3 month USD Libor plus 3.9% for the USDSubordinated Notes (9.26% at 31 December 2006). Payment of interest may, at theoption of the Company, be deferred for up to 20 consecutive quarters. 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). On 16 January 2006, the Company issued senior loan notes of US$26 million (£15.1million), (the "Senior Notes tranche 1"), due 15 January 2026 and callable bythe Company at any time, in whole or in part, after 16 January 2011. Expensesincurred in connection with the issue of the debt were £0.4 million. The Senior Notes tranche 1 bear interest at 3 month USD Libor plus 4.5% (9.86%at 31 December 2006). On 15 December 2006, the Company issued senior loan notes of US$20 million(£10.2 million) (the "Senior Notes tranche 2"), due 15 December 2026 andcallable by the Company at any time, in whole or in part, after 15 December2011. Expenses incurred in connection with the issue of the debt were £0.3million. The Senior Notes tranche 2 bear interest at 3 month USD Libor plus 4.15% (9.51%at 31 December 2006). The Senior Notes and the Senior Notes tranche 2 rank on a winding-up of theCompany in priority to distributions on all classes of share capital andsubordinated loan notes, and rank pari passu with each other but aresubordinated in right of payment to the claims of all unsubordinated creditorsof the Company (including, where applicable, all policyholders of theSyndicate). The Subordinated Notes and Senior Notes are listed on the Channel Islands StockExchange. 6. INCOME TAXES 2006 2005 £'000 £'000 Charge in period Current tax: UK Corporation Tax on profits of the period - -Adjustments in respect of previous periods - 10Foreign Tax (718) - Total current tax (718) 10 Deferred Tax: Origination and reversal of timing differences 7,560 (22,273) Tax on profit (loss) on ordinary activities 6,842 (22,263) Factors affecting tax charge for the period Profit (loss) on ordinary activities before tax 22,194 (74,843) Tax charge at standard rate of UK corporation tax of 30% 6,658 (22,454) Effects of: Utilisation of tax losses - 46Underwriting results taxable when declared (7,421) 29,570Election to disclaim technical provisions for tax purposes - (7,837)Other timing differences 45 685 (718) 10 Factors that may affect future tax charges Deferred tax is provided on the annually accounted technical result of each yearof account. A deferred tax asset of £21,654,000 (2005: asset of £29,214,000)has been recognised on annually accounted technical results. The Company's Lloyd's corporate members are subject to the General InsuranceReserve regulations contained in the Finance Act 2000 by virtue of their greaterthan 4% participation on the Advent syndicates. The accounts have been preparedon the basis that elections will be made as permitted by the regulations todisclaim until future periods tax deductions in respect of technical provisions. Inland Revenue has announced its intention to cease allowing the disclaimer ofreserves effective from 1 January 2007 but no such changes have been enactedinto law. Draft regulations have not been issued on the transitional rules forbringing such disclaimed reserves back into income. There is a risk that thefinal legislative changes could extend the period over which the Company canrecover its prior years' losses for tax purposes resulting in a higher degree ofuncertainty on the timing of that recoverability. Management is satisfied thatit has alternate strategies available for the utilisation of its losses. The Company's is subject to US tax on its share of syndicated 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 (2005:£nil). DEFERRED TAX 2006 2005 £'000 £'000 Deferred tax asset in respect of technical provisionsdisclaimed: 3,757 10,439 Deferred tax asset (liability) in respect ofunderwriting results to be declared: Underwriting Year of Account2001 (265) 572002 (126) (207)2003 - (7,048)2004 5,821 6,2202005 18,845 19,7542006 (6,602) - Deferred tax liability in respect of other timing 224 (1)differences 21,654 29,214 Deferred tax asset at 1 January 2006 29,214 Deferred tax charge in profit and loss account (7,560) Deferred tax asset at 31 December 2006 21,654 As required by FRS19 Accounting for Deferred Taxation, the Directors have provided for a deferredtax asset in respect of underwriting losses as they regard it as more likely than not that therewill be suitable future profits available to utilise these losses. The recoverability of thedeferred tax asset is reviewed annually and its carrying value adjusted as appropriate. 2006 2005 £'000 £'000Parent Company only Deferred tax asset in respect of decelerated capitalallowances 19 25 Deferred tax asset at 1 January 2006 25 Deferred tax charge in profit and loss account for (6)period Deferred tax asset at 31 December 2006 19 7. OTHER CREDITORS 2006 2005 £'000 £'000Due within one yearCorporation tax - 3Other taxes - 184Corporate other creditors 865 2,006Syndicate other creditors 429 172 1,294 2,365 Parent Company onlyCorporation tax - 3Other taxes - 39Other creditors - 2Interest payable 290 157Accruals 1,042 37 1,332 238 8. TANGIBLE FIXED ASSETS Furniture, Computer Total fittings and equipment equipments £'000 £'000 £'000 Book costAt 1 January 2006 932 2,021 2,953Additions 11 238 421 At 31 December 943 2,259 3,374 DepreciationAt 1 January 2006 535 1,368 1,903Charges for the year 112 625 909 At 31 December 2006 647 1,993 2,812 Net Book ValueAt 31 December 2006 296 266 562At 31 December 2005 397 653 1,050 9. INTANGIBLE FIXED ASSETS Goodwill on Syndicate Total acquisition capacity £'000 £'000 £'000 CostAt 1 January 2006 9,858 2,193 12,051Additions - 2,718 2,718 At 31 December 2006 9,858 4,911 14,769 AmortisationAt 1 January 2006 5,710 997 6,707Charge for the year 518 141 659 At 31 December 2006 6,228 1,138 7,366 Net Book Value At 31 December 2006 3,630 3,773 7,403At 31 December 2005 4,148 1,196 5,344 During 2006, the Company acquired all of the capacity not already owned byAdvent for 2008 and onwards, for 5p in cash for each £1 of capacity held onSyndicate 780 for the 2006 year of account. Members were also offered a"Limited Tenancy Arrangement", under which they would have the right toparticipate on Syndicate 780 for the 2007 year of account only plus a deferredpayment of an additional 5p in cash for each £1 of capacity retained for the2007 year of account payable on 30 June 2008 (the "Limited Tenancy Rights"). For the 2007 year of account, Syndicate 780 has total capacity of £150.6million, of which £126.0 million has been provided by the Company and £24.6million by Members under the Limited Tenancy Rights. The Company will be thesole capital provider for the 2008 year of account onwards. The £1.2 millionconsideration payable on 30 June 2008 will be amortised to expenses as the netpremium income is earned on the 2007 year of account to which the paymentrelates. 10. INVESTMENT IN GROUP UNDERTAKINGS Subsidiary Undertaking £'000Parent Company only costAt 1 January 2006 14,428Advent Re Holdings Limited 19,132At 31 December 2006 33,560 The opening balance consists of 100% of the share capital of Advent (StrategicInvestments) Limited (ASIL). ASIL is registered in England and Wales. ASILacts as an investment company owning 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 Captial (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. On 21 December 2006, the Company incorporated a Bermudan Class 3 reinsurer,Advent Re, whose shares are owned by Advent Re Holdings Limited (Advent ReHoldco), an intermediary holding company. Advent Re Holdco is wholly owned byAdvent Capital (Holdings) PLC. Advent Re and Advent Re Holdco are bothregistered in Bermuda. 11. 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. 2006 2005 £'000 £'000AssetsFinancial investments 80,437 110,117Reinsurers' share of technical provision 37,774 96,404Debtors arising out of insurance / reinsurance operations 39,459 64,947Other debtors 4,608 4,077Cash at bank 21,194 13,558Overseas deposits 3,539 3,813Accrued income 338 268Deferred acquisition costs 5,862 3,311Prepaid expenses 329 251 193,540 296,746 LiabilitiesTechnical provisions 217,423 344,176Creditors arising out of insurance / reinsurance operations 6,798 21,258Other creditors 429 73Accruals and deferred income 802 248 225,452 365,755 12. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS 2006 2005 £'000 £'000 Profit (loss) for the year 15,352 (52,580)Dividends paid - (2,896)Share issues 38,251 37,474Share options expense 143 52 Net addition (reduction) to shareholders' funds 53,746 (17,950)Opening shareholders' funds 34,581 52,531Closing shareholders' funds 88,327 34,581 2006 2005 Restated £'000 £'000 Parent Company only Profit (loss) for the year (810) 50,844Dividends paid - (2,896)Share issues 38,251 37,474Share options expense 143 52 Net addition to shareholders' funds 37,584 85,474Opening shareholders' funds 126,298 40,824Closing shareholders' funds 163,882 126,298 13. RECONCILIATION OF MOVEMENTS IN RESERVES Share Profit & Capital Other Total Premium Loss Redemption Account Account Reserve Reserves £'000 £'000 £'000 £'000 £'000 At 1 January 2006 31,759 (26,143) 21,065 (3,081) 23,600 (as previously reported)Restatement under FRS20 - (52) - 52 -At 1 January 2006 (as restated) 31,759 (26,195) 21,065 (3,029) 23,600Profit for the year - 15,352 - - 15,352Share issue 28,903 - - - 28,903Share options expense - - - 143 143At 31 December 2006 60,662 (10,843) 21,065 (2,886) 67,998 Other reserves comprise, the merger reserve arising through the consolidation ofAdvent Underwriting Limited, which was acquired in 1999, and also share optionexpense. Profit & Loss Account Restated £'000Parent Company only At 1 January 2006 (as previously reported) 62,493Restatement under FRS20 (52)At 1 January 2006 (as restated) 62,441Loss for the year (810)At 31 December 2006 61,631 14. COMMITMENTS There were no capital commitments or authorised but uncontracted commitments atthe end of the financial year. The Company leases certain land and buildings onshort-term operating leases, the minimum annual commitments being: On leases expiring within two to five years: £320,644. The Company has provided a letter of support to its subsidiaries, Advent CapitalLimited and Advent Group Services Limited. 15. RELATED PARTIES Accommodation costs, at an arm lengths price of £20,120 (2005: £13,250) 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 £3,986,288 (2005: £2,265,758). TheCompany's share of reinsurance recoveries from related parties under quota sharearrangements was £1,006,748 (2005: £5,981,208). 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. 16. RECONCILIATION OF PROFIT BEFORE TAX TO NET CASH INFLOW (OUTFLOW)FROM OPERATING ACTIVITIES 2006 2005 £'000 £'000 Profit (loss) before tax 22,194 (74,843)(Increase) decrease in debtors and prepayments (14,265) 24,386Increase (decrease) in creditors and accruals (12,503) 6,447Increase (decrease) in net technical provisions (46,118) 62,931Debt interest 3,560 1,153Foreign tax expense - 96Investment income (6,747) (1,085)Unrealised investment return (470) 316Depreciation 909 529Amortisation of goodwill 659 658Amortisation of debt issue costs 69 17Share option issue 143 52Foreign exchange movement (4,041) 4,654 (17,959) (13,340) 17. MOVEMENT IN CASH HOLDINGS At 1 January Cash Flow Foreign At 31 2006 exchange December movement 2006 £'000 £'000 £'000 £'000 Corporate funds held by Lloyd's 87,210 33,290 (6,959) 113,541Corporate cash at bank 2,027 3,763 (249) 5,541Syndicates' cash at bank 13,558 9,436 (1,799) 21,195Advent Re cash at bank - 19,132 - 19,132Syndicates' overseas deposits 3,813 12 (286) 3,539 106,608 65,633 (9,293) 162,948 18. STAFF COSTS (including Directors) 2006 2005 £'000 £'000 Wages and salaries 6,972 4,088Social security costs 567 498Other pension costs 562 526 8,101 5,112Recharged to third party capital (1,494) (2,037) 6,607 3,075 The increase in wages and salaries primarily arises from the 2006 bonus expenseof £2,262,500. Other pension costs are in respect of money purchase schemes andpersonal pension arrangements. Outstanding contributions at 31 December 2006were £35,108 (2005: £39,677). The average number of persons, including executive directors, employed by theCompany during the year was: 2006 2005 Management 4 3Finance and actuarial 8 9Underwriting 14 14Claims and Reinsurance 6 7Compliance 3 3IT 5 5Administration 5 5 45 46 19. DIRECTORS' EMOLUMENTS 2006 2005 £'000 £'000 Aggregate emoluments 1,980 809Fees 108 100Fees payable to third parties 45 22Contribution to money purchase pension schemes 94 79 2,227 1,010Recharged to third party capital (197) (316) 2,030 694 Number of Directors with accrued benefits under moneypurchase scheme 2 2 Highest paid Director Emoluments (including benefits in kind) 659 302Contribution to money purchase pension schemes 6 59 665 361Recharged to third party capital - (127) 665 234 20. PROFIT ATTRIBUTABLE TO MEMBERS OF PARENT COMPANY As permitted by section 230 of the Companies Act 1985, the Parent Company'sprofit and loss account has not been included in the Company's Accounts. The loss for the financial year before dividends dealt with in the Accounts ofthe Parent Company was £810,000 (2005: profit £50,844,000). 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 Numis Securities Limited Cheapside House 138 Cheapside London EC2V 6LH AUDITORS PricewaterhouseCoopers LLP Southwark Towers 32 London Bridge Street London SE1 9SY SOLICITORS Norton Rose Kempson House Camomile Street London EC3A 7AN PRINCIPAL BANKERS The Royal Bank of Scotland 5-10 Great Tower Street London EC3P 3HX REGISTRARS Capita IRG Plc The Registry 34 Beckenham Road Beckenham Kent BR3 4TU This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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