Final Results

31st Mar 2006 07:03

Advent Capital (Holdings) PLC31 March 2006 Advent Capital (Holdings) PLC ("Advent" or the "Company") For publication in the United Kingdom only. Not for release, publication or distribution in or into any other jurisdiction including, but not limited to,the United States, Canada, Australia, South Africa, Republic of Ireland or Japan 2005 Final Results Advent, the specialist Lloyd's insurer, today reports its 2005 final results forthe 12 months ended 31 December 2005. • Key highlights • Pre tax loss of £74.8 million • Post tax loss of £52.5 million (30.6p per share) • 2005 was a transitional year for the Company o Successful flotation on AIM with market capitalisation of £77 million o Raised £40m of equity and £25m of debt at IPO o Secondary capital raise of £30m of equity and £15m of debt in January 2006 • Appointment of two experienced and well respected Non Executive Directors to the Board • Successfully traded through the worst natural catastrophe year on record • Financial summary 2005 year 2004 year Profit (loss) before tax (£74.8m) £4.5mEPS (30.6p) 2.6pNet premium earned £65.1m £69.2mCombined Ratio 220% 103%Return on Equity (69.1%) 5.1%Net assets per share (post 2005 placing) 17.3p 49.9p • Current trading / outlook o Excellent pricing and coverage conditions - rates up 100% on key accounts o Improvement of policy terms and deductibles o Retrocessional business conditions better than post WTC o Increased capacity on Syndicate 780 from 53% to 80% (£122.8m) - ensuring ability to capitalise on stronger rating environment. o Over 50% of target income already achieved in 2006 o Peak exposures reduced with a view to reducing volatility o Securing better margins through higher pricing and lower exposure Syndicate 780 will be making a cash call of 45% on capacity from the 2005 yearof account. This is already fully provided for and does not impact on theGroup's underwriting capital. • Brian Caudle, Chairman of Advent Capital (Holdings) PLC commented: "2005 was a challenging year for the Company, however we have shown resilienceand achieved a great deal in the 9 months since listing. Although disappointedto be reporting a loss, we have managed to withstand the worst year of naturalcatastrophes on record and as a result, we are now taking advantage of thenatural uplift that follows such an extreme year. As such we are now taking action on several fronts in order to deliver thereturns that shareholders expect" Advent Capital HoldingsKeith Thompson 020 7743 8200Chief Operating Officer Neil Ewing 020 7743 8250Investor Relations Pelham Public RelationsJames Henderson 020 7743 6673Gavin Davis 020 7743 6677 CHAIRMAN'S STATEMENT 2005 was a transitional year for Advent. The Company successfully listed on AIM on 3rd June with a market capitalisationof £77 million. During the year we raised additional equity and debt of: • £40 million of equity and £25 million of debt in June 2005 as part of the IPO; and • £30 million of equity and £15 million of debt announced in November 2005, and approved by shareholders in January 2006 We increased participation on Syndicate 780 for 2006 from £82 million (53% ofcapacity) to £122 million (80% of capacity). We are now experiencing favourable market conditions with rate increases of upto 100% on catastrophe exposed accounts together with improvements in policyterms and deductibles further reducing gross exposure to catastrophe losses We have strengthened the Board with the appointment of two experienced and wellrespected directors While these are achievements of which we are proud 2005 was also a verydifficult year for Advent and the entire insurance industry due to the worstyear of natural catastrophes on record. The hurricanes that hit America were notonly unprecedented in terms of intensity, but also in their frequency. With ourbusiness primarily focused on catastrophe exposed property insurance andreinsurance, the Company reported a full year pre-tax loss of £74.8 million for2005 (post tax £52.5m, earnings per share - loss 30.6p), which reflects £79.7million of losses from the level of our involvement in the major naturalcatastrophes experienced in 2005. Current trading conditions Syndicate 780 has outperformed the Lloyd's market in 28 of the last 30 closedyears of account returning an average profit of 19.2% with profits in the 2002and 2003 accounts of 31.3% and 27.5% respectively. However, for the 2004 and2005 years of account, Syndicate 780 is currently forecasting losses of 17.5% to27.5% and 72.5% to 82.5% respectively. With price increases and underwriting actions taken on renewals, Syndicate 780is reducing its exposure to catastrophe losses for the 2006 account. We havemoved into 2006 with the clear intention of taking full advantage of theexcellent pricing and coverage conditions which exist in the markets in which wecontinue to operate, with the objective of generating underwriting returnsconsistent with our long term track record. The ultimate result will, of course,depend on the level and frequency of natural catastrophes occurring in 2006.However, given the experiences of 2005, everyone at Advent has the desire,motivation and shared goal of moving back into profit. I would like to pay tribute to all of the employees at Advent. They share in thedisappointment of the latest results but their strength, resolve and commitmentwill take the business forward into the future. The Advent culture encouragesemployees to have a financial involvement in the business and following theflotation of the Company, I am delighted that some 70% of our employees areshareholders in the Company. It creates the right working environment fromwhich we will collectively progress during 2006 and into the future. The Future To achieve our long term objectives of generating maximum returns for ourshareholders from our specialist underwriting activities in the Lloyd's Marketwe are taking action on several fronts in order to create the platform fromwhich to progress the business: • We are taking full advantage of current market conditions with significant price increases and improved terms and deductibles. • We have taken the opportunity to increase the Group's underwriting on Advent Syndicate 780 for 2006 in light of strong market conditions and opportunities. Advent now represents 80% of the total underwriting capacity of Syndicate 780. • At a time when we are employing capital in the best possible way in order to take advantage of buoyant market conditions, the Board has decided it is not appropriate to pay a dividend for 2005. • The underwriting business model focuses on lines of business which are exposed to major catastrophes and therefore prone to volatile results. Our strategy is to retain our involvement in our areas of expertise but to mitigate the "high volatility" nature of results by reducing our peak exposure to major catastrophes. The remainder of this report provides details on the 2005 and 2006 activitiesand highlights our views on how we plan to produce consistent and attractivereturns for our shareholders. Brian F CaudleChairman 30 March 2006 FINANCIAL SUMMARY 2005 2004 2003(1) 2002(1) Restated Restated £'m £'m £'m £'m Gross premiums written 100.5 74.7 120.2 136.1 Net premiums written 62.9 63.7 91.0 109.4 Net premiums earned 65.1 69.2 88.7 135.0 Net claims incurred (124.2) (51.3) (45.2) (105.2) Net operating expenses (19.0) (18.8) (25.2) (30.2) Profit/ (loss) before tax (74.8) 4.5 18.1 13.6 Profit/ (loss) after tax (52.5) 2.7 13.1 25.4 Return on equity (69.1%) 5.1% 33.0% - Per share amounts Earnings (30.6p) 2.6p 12.4P 37.9p Dividend 2.75p 2.75p - - Net Assets 15.7p 49.9p 50.1p 37.6p Net Tangible assets 13.3p 44.2p 43.7p 28.1p Per share amounts post January 2006capital raising Net assets 17.3p Net tangible assets 15.8p Operating ratios Claims ratio 191% 74% 51% 78% Expense ratio 29% 29% 26% 23% Combined ratio 220% 103% 77% 91% (1) The Group was indemnified from loss in respect of certain syndicate's yearsof account. The syndicate years of account subject to indemnity were, with theexception of Syndicate 2, closed by reinsurance into another syndicate in whichthe Group does not participate. The financial summary excludes the results ofthe syndicates subject to indemnity in 2003 and 2002. 2004 and 2003 have beenrestated as described in the Changes to Accounting Policy Note to the Accounts. Summary of 2005 results shows impact of major catastrophes - The combined ratio across all classes of business of 220% includes 136 net claims ratio points for the 2005 hurricanes, and indicates both the severity of these events and the underlying quality of the book of business in the absence of major catastrophes. - The net claims ratio for insurance lines of business was 180%. - The net claims ratio for reinsurance lines of business was 84%. - Gross written premium was £100.5 million in 2005 compared to £74.7 million in 2004. - Investment return was £6.6 million in 2005 compared to £4.5 million in 2004 Post Balance sheet events - At 31 December 2005 Advent had long term debt of £27.1 million, (2004: Nil). A further £15.1 million of long term debt was raised in January 2006. - A further £29.3 million equity (after expenses) was raised in January 2006 by way of a placing to institutional shareholders resulting in total shareholders' equity of £63.9 million. Hurricane losses The ultimate net cost to the Company (claims less reinsurance recoveries minusnet reinstatement premiums) of Hurricanes Katrina, Rita and Wilma is estimatedto be £79.7 million (US$143.5 million) at 31 December 2005. Hurricane Katrinawas by far the largest natural catastrophe to affect the US in recent historywith the insurance industry loss being predicted at US$55 billion. In addition,Hurricane Wilma is forecast to be the seventh costliest natural disaster onrecord with an insurance industry loss estimated at US$8.6 billion. Estimatingultimate losses from major catastrophes is highly dependent upon the severityand timing of the events and the ability to obtain accurate information withwhich to assess and project ultimate claims. There still remains uncertainty asto the overall ultimate losses associated with these 2005 Hurricanes. Thecomplexities relating to claims from Hurricane Katrina in particular give riseto much uncertainty with issues of flood coverage, business interruption, andstorm surge. In addition Syndicate 780 has exhausted its reinsurance protectionsfor this event. From our experiences of the hurricane activity in 2004, we have taken a morerobust approach to assessing claims for the 2005 Hurricanes. Loss estimates havebeen derived from a ground up review of individual policies across the mainlines of business, analysing potential claims contract by contract, contact withclients and use of catastrophe models. Whilst modelling input has been used, wehave been mindful of, and adjusted for, the unusual loss features of HurricaneKatrina. Hurricanes The first four months of 2005 saw a major reassessment of our ultimate reservesfor the 2004 Hurricanes (Charley, Frances, Ivan and Jeanne) given the receipt ofnew information following completion of our 2004 accounts. During 2005, werecorded net adverse developments of £11.5 million on estimated losses for thesehurricanes of £29.4 million recorded at 31 December 2004. The revised estimatesspecific to these hurricanes have proved to be adequate during the second halfof 2005 and claims are currently running off as expected. In the second half of 2005, we saw three major hurricanes in America withHurricane Katrina being the largest. The gross and net costs to Advent at 31December 2005 are detailed below: Gross Ultimate Net Ultimate US$ m US$ m Hurricane Katrina 196.0 85.7 Hurricane Rita 51.5 20.4 Hurricane Wilma 53.4 37.4 Advent share of loss - US$ m 300.9 143.5 Advent share of loss - £ m 167.4 79.7 The impact of the 2005 hurricanes for the main lines of business of Syndicate780 are detailed below. 2005 Hurricane Losses forecast for Syndicate 780 (US$ million) Hurricane Katrina Hurricane Rita Hurricane Wilma Gross Loss Net Loss Gross Loss Net Loss Gross Loss Net LossInsurance 29.5 14.5 Insurance 2.5 2.0 Insurance 2.5 1.7Energy 22.4 11.4 Energy 16.3 4.0 Energy 0.0 0.0Treaty 91.3 34.7 Treaty 32.5 6.7 Treaty 32.7 17.7Assumed 195.7 82.3 Assumed 24.6 15.4 Assumed 68.6 50.6Marine 30.9 18.9 Marine 21.3 10.5 Marine 0.7 0.6 Total 369.8 161.8 Total 97.2 38.5 Total 104.5 70.6 For hurricanes Katrina, Rita and Wilma Syndicate 780 has recorded on a grossbasis at 31 December 2005: US$m £m Paid claims 60.1 34.9Outstanding claims 305.3 177.3IBNR 206.1 119.7 Total 571.5 331.9 There have been no post year end events that would materially change thereserves established for the 2005 hurricanes. Hurricane Wilma hit Mexico and Florida in October 2005 and our initialassessment in November 2005 was based on very little information and usingindustry loss estimates of US$ 10 billion. Since then the current US industryloss estimate for Hurricane Wilma has been published at US$ 8.6 billion. As aresult Syndicate 780 has now excluded certain reinsurance recoveries due to thefact they do not respond unless the market loss is US$ 10 billion or greater.This increased the net loss of Syndicate 780 at 31 December 2005 by some US$ 20million (£12 million). The collectibility of reinsurance recoveries is a key factor of any major lossyear. During 2005, Syndicate 780 issued collection notes to reinsurers for the2005 hurricanes totalling some US$ 96 million and has so far received US$91million - 98% of what was requested as due and owing. The reinsurance recoveries on claims reserves at 31 December 2005 for Adventstand at £94 million. The analysis of these recoveries show that only 6.7%(excluding balances for which collateral is held) were rated below BBB. Underwriting strategy and present market conditions Advent is well known as a property insurance and reinsurance specialist and overthe long term our goal is to try and outperform the Lloyd's market average. Themajor catastrophes seen in 2004 and especially in 2005 may indicate a pattern ofgreater frequency and severity of loss events and have given businesses, whichspecialise in these risks, the impetus to focus on reducing the exposure andvolatility inherent in this sector. The strategy for 2006 is not to seek major expansion in business but to beselective, securing higher prices for less risk thereby reducing our aggregateand peak exposures to major catastrophes. The 2006 Business Plan is targeting a 20% return on capacity with a catastropheload of 16% of capacity. Syndicate 780 plans to reduce the "assumed" premiumincome by some 60% and look for increased premium income from the treaty,insurance and energy lines of business. 2006 Business Plan premium income net of brokerage prior to reinstatements,comparison of income written by ACH for 2005 / 2006 plan based on ownershipprofile Class 780 ACH 780 ACH ACH Diff ACH portfolio split 2005 £m 2006 £m 2005/06 £m 2005 2006 Property treaty 39.1 20.7 51.7 41.4 20.7 32% 42%reinsuranceAssumed reinsurance 48.2 25.5 17.5 14.0 -11.5 40% 14%Property insurance 18.2 9.6 26.5 21.2 11.5 15% 22%Auto 1.3 0.7 2.1 1.7 1.0 1% 2%Casualty reinsurance 2.6 1.4 4.1 3.3 1.9 2% 3%Accident and health 0.8 0.4 1.7 1.4 1.0 1% 1%Energy 6.7 3.6 10.6 8.5 4.9 6% 9%Marine reinsurance 3.4 1.8 8.0 6.4 4.6 3% 7% Total 120.3 63.8 122.3 97.8 34.1 100% 100% ACH Ownership 53% 80% In 2006, we are operating with reduced net exposures to major catastrophes bythe combination of reduced aggregate, better pricing and the ability to purchasereinsurance at the expected levels. Our expected gross and net position for a major catastrophe the size ofHurricane Katrina, (based on our own assessments enhanced by various modellingtools such as AIR Worldwide, RMS etc.) proved to be inaccurate albeitrecognising the additional features surrounding this loss which added to theultimate costs. In comparison to the five larges realistic disaster scenarios assessed forLloyd's purpose in April 2005 against our 2006 plans, these planned gross andnet losses against the 2006 plans show significant reductions: Florida Wind LA Quake Euro Wind Japan Quake Gulf of Mexico Industry loss $71 bn $72 bn $31 bn $51 bn $61 bn2005 (April) Gross 78% 70% 72% 34% 86%2006 Plan Gross 64% 50% 57% 19% 66%2005 (April) Net 30% 16% 38% 21% 33%2006 Plan Net 16% 14% 16% 14% 17% Our ability to achieve these reductions in exposure to major catastrophes isdependent on our ability to achieve the underlying 2006 Business Planassumptions for pricing, changes in terms and conditions and the purchase ofreinsurance. Syndicate 780 traditionally underwrites a high percentage of its premium incomeat 1 January and to date we have seen clear evidence of better pricing andcoverage for risks written: Reinsurance • Property Treaty Reinsurance - the largest area of exposure is from US catastrophe business where pricing on loss making contracts has increased by up to 100%, depending on loss frequency to the contract during 2005. Deductibles here also seen significant increase where exposures or losses warrant it. • Assumed - pricing for catastrophe treaty retrocessional reinsurance has increased by between 50% and 100%. Deductibles have increased by between 25% and 50% Insurance • Pricing for catastrophe exposed property insurance open market business has increased by up to 50%. Business written under binding authorities in the US has experienced price increases of 25% or more on catastrophe exposed accounts. Energy • Pricing for Gulf of Mexico exposed risks has increased from between250% and 750%. In addition, deductibles for these risks have increasedsignificantly, together with annual aggregate windstorm caps - a featurepreviously not seen on offshore energy risks. Capital and underwriting capacity Having started Advent in 1994 as a small private investment company with thesupport of some 40 shareholders, we took great pride in seeing the HoldingCompany quoted on the London Stock Exchange's AIM in June 2005. The flotation was achieved at a difficult time for the capital markets andsucceeded with the support of our major shareholders, in particular FairfaxFinancial Holdings Limited (Fairfax), along with the introduction of newinstitutional shareholders who continued to support Advent in its subsequentcapital raising exercise completed in January 2006. The flotation saw Advent raise some £65 million by way of equity and debt. InNovember we took the opportunity to increase Advent's underwriting at Lloyd'sfor 2006 as well as strengthen the overall financial position of the Company bythe raising of a further £45 million, again by way of equity and debt, whichreceived shareholder approval on 6 January 2006. The capital requirements for Advent are driven by the Individual CapitalAssessment (ICA) process undertaken by Advent Underwriting in respect ofSyndicate 780 and then individual capital requirements of the Advent CorporateMember as determined by the Economic Capital Assessment (ECA) process. Advent set up a new corporate member (Advent Capital No. 3 Limited) tounderwrite for the 2006 underwriting year on Syndicate 780 which has a capitalrequirement of 67% of underwriting capacity. Advent deposited £82 million intoits Funds at Lloyd's in November 2005 in order to underwrite £122 million ofcapacity on Syndicate 780 for 2006. Advent has additional Funds at Lloyd's in place to support the underwriting ofits other corporate members (Advent Capital Limited and Advent Capital (No. 2)Limited) for underwriting years 2005 and prior. The FAL arrangements enteredinto in November 2000 with Fairfax to provide Advent with the use of £110million of Funds at Lloyd's to support underwriting for a five year period (ieunderwriting years 2001 - 2005), ceased at 31 December 2005. The total Funds at Lloyd's currently in place are: Position at 31 December 2005 ACHP Fairfax Year of FAL's FAL's Account £'m £'m Applicable Advent Capital Limited 3.1 53.9 2001, 2004, 2005Advent Capital (No. 2) Limited 1.8 71.6 2003Advent Capital (No. 3) Limited 82.4 - 2006Total 87.3 125.5 In January 2006 Advent lodged £38 million into the Funds at Lloyd's of AdventCapital Limited in readiness to meet open years losses as and when they falldue. This led to the release of £38 million from the funds previously depositedby Fairfax. Cash call by Syndicate 780 Syndicate 780 has announced a cash call for the 2005 year of account equating to45% of underwriting capacity. Advent's share is £39.6 million and it will bemeeting this call from funds previously lodged with Lloyd's in January 2006. Itdoes not affect the 2006 underwriting or the funds at Lloyd's deposited inNovember 2005. Corporate Governance Our underwriting operations are regulated by the Financial Services Authority(FSA) which works closely with Lloyd's. Advent recognises the benefit of strong corporate governance and the regulatorydemands of a quoted company on the AIM market of the London Stock Exchange. Itis essential that strong management and internal controls are in place. Wecontinue to review and where necessary improve any internal functions whichenhance our day to day operations. Strong corporate governance is essential in any business and with the move toAIM we have been delighted that we have been able to attract new Non-Executivedirectors of the highest quality to our Board. Peter Stormonth Darling and EricStobart have recently joined the Board and we know their input and experiencewill enhance the future business decision making of the Group as well as ensurethe right disciplines are maintained. We would like to pay tribute to Mr Stanley Zax who retired from the Board inNovember 2005. Stanley joined the Board in 1999 and his contribution and uniquestyle has been very important in what have been challenging times. We would also like to record our thanks to Mr Raymond Salter who will not beapplying for re-election to the Board at our Annual General Meeting. Raymond hasbeen a non-executive director of the Company for 6 years during which time hehas made important contributions to the development of the business. Business Review Advent overview Advent is a well-established specialist reinsurance and insurance groupoperating in the Lloyd's market through Syndicate 780. Advent's primary area ofexpertise is property catastrophe business and it also writes some specialisedlines of business such as energy, marine excess of loss, casualty and personalaccident. Advent Capital (Holdings) PLC is quoted on the AIM Market and its principaloperating subsidiary, Advent Underwriting Limited, manages Syndicate 780 whichhas a capacity of £153 million for the 2006 year of account, of which the AdventGroup provides 80% (2005 - 53%). The Group therefore derives its income fromboth management fees and profit commission, and from the Group's participationon Syndicate 780. The nature of the business that Advent specialises in is volatile, as has beenevidenced by the impact of the unprecedented level of natural disasters during2004 and 2005. While Advent has significantly outperformed the Lloyd's markethistorically in the medium to long term, the last two years have seen the Groupexperience substantial hurricane losses leading to a pre tax loss of £74.8million in 2005. Advent seeks to mitigate the volatility of the business writtenby reducing exposure to risk in its non-underwriting operating practices,including stringent risk management in all areas including purchasing ofreinsurance, maintenance of approved broker lists and investment of syndicatefunds. The focus of the Group on property catastrophe business has meant that it iswell placed to profit from the significant rate rises that have been experiencedin this sector during the 2006 renewal season. Advent has seen rises of up to100% on its main lines of business which were affected by the 2005 hurricanes,in addition to amended coverage terms and policy deductibles which will reducethe Group's exposure to natural peril events. While Advent seeks to maximise the return to its capital providers andshareholders in the medium to long term, it also works hard to establish andmaintain long standing relationships with its clients and strives to offer thehighest level of service and professionalism from both its underwriting andclaims handling teams. 4 year result summary 2005 2004 2003 2002 Restated Restated Restated (1) (1) (1) £'000 £'000 £'000 £'000 Gross premiums written 100,550 74,749 120,240 136,093 Net premiums written 62,949 63,734 91,062 109,393 Net earned premiums 65,070 69,221 88,675 135,003 Net claims incurred (124,210) (51,314) (45,235) (105,231) Change in other technical provisions - - 691 12,427 Results before net operating expenses (59,140) 17,907 43,440 29,772 and investment return Investment contribution 6,614 4,503 3,593 4,605Other income 1,915 4,563 1,169 2,501Sale of Subsidiary - - 6,073 -Net expenses (24,180) (22,458) (36,915) (35,684) Managing agency income Agency fees 595 849 628 1,170 Profit commission 822 3,178 (435) 435 1,417 4,027 193 1,605Other income 498 536 976 896 Profit / (loss) before tax (74,791) 4,515 18,051 13,621 Pre tax cost of major catastrophes (91,565) (29,384) - - Net claims ratio 191% 74% 51% 78% Expense ratio 29% 29% 26% 23% Combined ratio 220% 103% 77% 91% Net claims ratio of major catastrophe 141% 42% - - As mentioned in the Chairman's Statement, the financial performance of the grouphas been severely impacted by the 2005 hurricanes. Last year, following the 2004hurricanes (Charley, Frances, Ivan and Jeanne), much comment was made regardingthe size and frequency of natural catastrophe losses, with a final estimate ofindustry wide losses of between US$ 44 and US$ 48 billion. 2005, however, haseasily surpassed 2004 to be the worst year on record for catastrophe losses withcurrent estimates for the 2005 hurricanes of over US$ 80 billion. The Company recorded a loss for the year before taxation of £74.8 million,including £79.7 million from the net impact of the 2005 hurricanes and £11.8million of adverse development from the 2004 hurricanes. (1) For an explanation of restatements, see page 6. Sources of income 2005 2004 2003 2002 £'000 £'000 £'000 £'000 Underwriting result (78,098) (846) 18,083 8,756 Investment result 6,614 4,503 4,419 7,889 Agency income 1,915 4,563 1,169 2,501Sale of subsidiary - - 6,073 -Other charges (5,222) (3,705) (11,693) (5,525) Group operating profit / (loss) (74,791) 4,515 18,051 13,621 Capital table 2005 2005 post equity and debt raising* £'000 £'000 Long term debt 27,104 41,783 Shareholders' funds 34,581 63,849 Debt / Equity 78.4% 65.4% Debt / Total capital 43.9% 39.6% * ( £29.3 million of equity and £14.7 million net proceeds of debt) Underwriting overview Whilst gross premiums written increased by 34% from £74.7 million in 2004 to£100.5 million in 2005, partially due to reinstatement premiums receivablefollowing the 2005 hurricanes, net earned premiums reduced slightly from £69.2million in 2004 to £65.1 million in 2005, reflecting our costs of reinstatingour own reinsurance protection. Net incurred claims, at £124.2 million (2004: £51.3 million), include £93.3million in respect of Katrina, Rita and Wilma. Excluding the impact of the 2005hurricanes our claims ratio would have been 55%, against an actual claims ratioof 191% as shown above (2004: 74%). In addition to the 2005 hurricanes, claimsincurred during 2005 also reflect a strengthening of the reserves in respect ofthe hurricanes affecting the USA in 2004. The impact of the 2004 hurricanes inquick succession and in close proximity led to a number of issues, such as ashortage of loss adjusters and pressure on resources, both materials and labour,that created a supply and demand imbalance that ultimately resulted in increasedclaims. £8.9 million of this reserve strengthening was identified at the time ofour listing on AIM as an IPO related adjustment and is included in the figuresfor 2005 above. Net incurred claims are after recoveries from our own reinsurers of some £77.5million (2004: £14.0 million). To date, over £42 million has already beencollected being 98% of the amount requested to date. Further recoveries will bemade as and when further gross claims are paid. Non-marine reinsurance This sector of the account comprises catastrophe and risk cover for insuranceand reinsurance contracts against both individual risk and catastrophe losses.Geographically the US is the largest area of exposure and the figures reflectthe impact of the three major hurricanes making landfall in the USA in 2005.Certain components within the reinsurance account are written largely withoutthe benefit of reinsurance therefore the net claims ratio is a significant loss. Rates during the first half of 2005 were largely flat on the US and Assumedcatastrophe accounts but down by 10% on the non-US catastrophe portfolio. Duringthe third and fourth quarter rates increased in response to the US windstorms,with fourth quarter, rates showing increases of over 25% on US catastrophe andflat renewals for the non-US portfolio. It is estimated that the combined insurance industry loss from these events willbe in the region of US$80 billion with a significant proportion, due to the sizeof the individual events, falling to the reinsurance market. The 2005 hurricanelosses combined with the hurricanes losses in 2004 have led to major changeswithin the catastrophe reinsurance market. In 2006 on our US exposed portfolio, deductibles have been increasedsignificantly, cover has become more restrictive and also more territoriallyspecific, particularly on our Assumed portfolio. Rating has shown dramaticimprovement with some accounts experiencing rate increases of over 100% as wellas benefiting from improvements in underlying portfolios as Insurers seek toreduce their exposures down in major areas of concentration. Outside of the US,improvements are less dramatic as recent loss frequency and severity has notbeen material. However, even in territories that have not seen loss activity,improvements are still being seen in price and deductibles. 2005Non-marine reinsurance £'000 Gross Premiums Written 80,140Net Premiums Written 58,146Net Premiums Earned 58,703Net Claims Incurred (105,531)Net Claims Ratio 180%Technical Resultbefore Expenses (46,828) Property insurance The property insurance sector is a mixture of both personal and commercialinsurances written either through underwriting facilities or on an individualrisk basis. The US represents the largest segment of the account andconsequently the section was impacted by the 2005 hurricanes. After reinsurancerecoveries the property account is showing a profit before expenses. Property rates were down by 7.5% at the mid year stage on US risks and down justover 9% on the non-US account. The impact of the hurricanes caused rates tostabilise and by year end, US property risks were beginning to see single digitrate increases whilst non US rate reductions remained similar to thoseexperienced in the first half of the year. Terms and conditions going into 2006are seeing significant improvements, particularly on the US property risks, withrate increases in excess of 25% for any catastrophe exposed accounts plusimproved deductibles and greater use of sub limits for accounts with largecatastrophe exposures. Outside of the US, rates are still seeing signs ofcompetition especially in the UK where commercial rates are down by over 10%. 2005Property insurance £'000 Gross Premiums Written 10,279Net Premiums Written 7,703Net Premiums Earned 8,774Net Claims Incurred (7,402)Net Claims Ratio 84%Technical Resultbefore Expenses 1,372 Marine The marine segment of the portfolio covers our Marine excess of loss and ouroffshore Energy portfolios. Cover is given for both individual risk andcatastrophe accumulations. With a considerable amount of offshore energyproduction concentrated in the Gulf of Mexico, the Marine classes were seriouslyimpacted by hurricanes Katrina and Rita. The final result is a significant netloss before expenses. Offshore energy rates were flat during the first half-year but by the fourthquarter, rate increases averaging over 40% were being achieved with thoseaccounts with Gulf of Mexico exposures seeing significantly higher increases.Marine excess of loss rates were down by 7.5% at the mid year stage but by yearend, rates had turned and increases of over 6% were being seen. Significant changes have occurred in both of these classes for 2006 with, on theMarine reinsurance account, cover now split between catastrophe and risk losses,significant increases to deductibles, more restrictive cover, especially forEnergy lines and major increases in price. On the Energy account deductibles perrig have increased significantly, sub limits are being applied to Gulf of Mexicoexposures, business interruption is rarely given and prices are up dramatically,in some cases by multiples. Outside of the Gulf of Mexico rates on both theEnergy and Marine reinsurance are increasing and improved terms are beingachieved although to a lesser degree than for the Gulf exposed accounts. 2005Marine £'000 Gross Premiums Written 7,256Net Premiums Written 4,783Net Premiums Earned 4,789Net Claims Incurred (16,352)Net Claims Ratio 341%Technical Resultbefore Expenses (11,563) Other "Other" includes additional underwriting areas of Syndicate 780, such asPersonal Accident and Casualty, and the results from the run-off of Syndicates 2and 506. The figures are distorted by the closure of the 2001 account of Syndicate 506,the last remaining year of account of that syndicate. The net effect on thegroup of this final closure is a loss of £188,000 in 2005 but our share of thereinsurance to close is included in reinsurance premiums written with acorresponding reversal of brought forward claims provisions. The 2001 and 2002 underwriting accounts of Syndicate 2 continue to run-off. Thereserves set at the last year end continue to be adequate and the Group's shareof their 2005 results is a profit before expenses of £1.5 million. While Syndicate 780 does not write large amounts of Casualty business, exposureto the various market losses such as Enron, WorldCom and laddering has led to areserve strengthening of £3.5 million before expenses. 2005Other £'000 Gross Premiums Written 2,875Net Premiums Written (7,683)Net Premiums Earned (7,196)Net Claims Incurred 5,075Net Claims Ratio 71%Technical Resultbefore Expenses (2,121) Investment Performance Total Group Syndicate £'000 £'000 £'000 Financial Investments 111,172 1,672 109,500 Cash 102,795 89,237 13,558 Investment Return 6,614 2,442 4,172 The overall investment contribution of £6.6 million, an increase of £2.1 millionor 47% over 2004 should be viewed as two component parts. Advent's share of theinvestment return of the syndicates on which it participates, at £4.2 million,has increased by 60% from the £2.6 million achieved in 2004. This performancecomes on the back of relatively higher interest rates in the US where theFederal Reserve Bank increased rates at each quarterly meeting in 2005, a totalof 2% from 2.25% to 4.25%, and stable rates in the UK where the Monetary PolicyCommittee only made one adjustment to the UK base rate, a cut of 0.25%. Althoughthe syndicate funds are conservatively managed, being held mainly in bonds,exposure to non-government securities was increased during 2005 resulting inadditional yield. The return on Advent's own funds increased from £1.9 million in 2004 to £2.4million in 2005, reflecting the increased funds available to the Group followingthe capital and debt raising of £65 million in June. As the majority of theGroup's funds are held in cash in sterling and euros, the increasing interestrates in the US only had a minor impact on the Group's investment return. Following the additional capital and debt raising of £45 million in January2006, Group funds now total approximately £136 million. Given the size of thesefunds, investment managers will shortly be appointed and a new investmentstrategy adopted for 2006. Other Income and Expenses Other income includes agency fees and profit commission receivable from thirdparty names on Syndicate 780. While the 2003 account of Syndicate 780 onlyclosed at 31 December 2005, the Group earned the majority of the profitcommission receivable in 2004 (£3.2 million) with only a further £0.8 millionincluded in the 2005 results. Apart from profit and loss on exchange, expenses in 2005 were very similar tothose in 2004, though the 2005 figures include seven months of interest (£1.2million) on the long-term debt issued in June 2005. However, the 2005 resultsinclude a loss on foreign exchange of £4.1 million compared to a profit of £0.4million in 2004. This loss has arisen due to the movements in the £/US$ exchangerate between last year end and this year end and the disparity between theaverage exchange rate for 2005 used to translate items in the profit and lossaccount and the closing rate. The majority of this loss is partially offset by aprofit of £0.8 million in respect of the restatement of non-monetary assets athistoric rates of exchange. These non-monetary assets include unearned premiumreserves, deferred acquisition costs and the reinsurer's share of any unearnedpremium reserves that have now to be translated at historic rates whilstmonetary items, such as cash and investments, are still translated at the rateapplicable at the balance sheet date. Taxation The loss for the year has given rise to a tax credit of £22.3 million (2004: taxcharge of £1.8 million), an effective tax rate of 29.8% (2004: 40.1%) comparedto the standard tax rate of 30%. This tax credit, when added to deferred taxesbrought forward, produces a deferred tax asset carried forward of £29.2 millionwhich, in the opinion of the Directors after careful consideration and modellingof future revenue streams, is considered more likely than not to be recoverableby the offset of future profits against the tax losses brought forward. Post Balance Sheet Events As disclosed in Note 20 to the Accounts, on 6 January 2006 the Company issued150,000,000 New Ordinary Shares of 5 pence at 20 pence per share, pursuant to aplacing of shares for net cash proceeds of £29.3 million. As also described inNote 25, the Company issued US$26 million of senior subordinated loan notes on16 January 2006 for net proceeds of £14.7 million. If both these new shares and the loan notes had been issued on 31 December 2005the consolidated balance sheet would have been as follows :- Pro forma Consolidated Net Assets at 31 Consolidated December 2005 Net Assets at Adjustments 31 December for the Placing 2005 and Loan Notes £'000 £'000 £'000 AssetsIntangible assets 5,344 - 5,344Investments 111,172 - 111,172Deposits with cedants 10 - 10Reinsurer's share of technical 96,404 - 96,404provisionsDebtors 101,128 - 101,128Other assets- Tangible assets 1,050 - 1,050- Cash at bank 102,795 43,947 146,742- Overseas deposits 3,813 - 3,813Repayments 8,451 - 8,451 Total assets 430,167 43,947 474,114 LiabilitiesProvision for unearned premiums 15,689 - 15,689Claims outstanding 328,487 - 328,487Deposits received from reinsurers 99 - 99Long term debt 27,104 14,679 41,783Creditors 23,425 - 23,425Accruals and deferred income 782 - 782 Total liabilities 395,586 14,679 410,265 Total net assets 34,581 29,268 63,849 Shareholders' funds 34,581 29,268 63,849 Dividends On 26 May 2005 the Company paid a dividend of 2.75p per Ordinary Share (2004:2.75p). Risk Management Overview Advent operates in a sector of the insurance market that can experiencesignificant volatility; the Group therefore manages closely both insurance riskand operational risk. Risk management is the process that enables a business to: • Identify and understand the risks that it faces in the pursuit of its business objectives; • Assess and prioritise the risks identified and the means of mitigating them; • Where possible and commercially feasible, reduce the probability and impact of those risks; • Regularly review, monitor and report on those risks in order to take informed actions; and • Ensure that any new risks, or changes to existing risks, are captured. Integrating risk management activities with strategic planning, overall businessobjectives and day to day activities provides the basis for consistent andeffective management of risk. Advent's principal operating subsidiary, Advent Underwriting Limited, isauthorised and regulated by the Financial Services Authority and as suchcomplies with the risk management requirements of the FSA Prudential Sourcebook.Advent Underwriting Limited has a separate Audit Committee which is dedicated toreviewing internal audit reports and ensuring the appropriateness andeffectiveness of the systems and controls in place to mitigate risk at theoperating subsidiary and syndicate level. This Audit Committee has a right tocall meetings of the Group Audit Committee and to attend any meeting of suchCommittee to raise any issues relating to risk management or internal audit. Risk Appetite The Group's business strategy is to accept underwriting risk from predominantlyshort tail catastrophe exposed classes of business with the aim of achievingabove Lloyd's market average profitability as a percentage of capacity over themedium to long-term period. The Group seeks to reduce the amount of overall riskto the business by reducing risk or volatility that arises from other areas ofits business, for example non-underwriting operations and investments. Risk Management Process During 2004, Advent Underwriting Limited undertook an extensive risk managementdevelopment programme and now employs a dedicated risk manager who reports tothe Director of Compliance and Audit Committee. The board of directors is responsible for ensuring the organisation operates asuitable risk management framework and carries out effective oversight of allrisk management activities. The risk management processes developed over the last 2 years comprises of thefollowing activities: • risk identification: ensuring that current and new or future risks are identified, as well as only changes to existing risks; • risk management and control: the identification of mitigating controls for the risks identified and an assessment as to their adequacy and the design and implementation of effective action plans, where required, to reduce risks to an acceptable level; • risk monitoring: the review of risks identified and any changes to the exposure to these risks; and • risk reporting: the regular reporting to the Executive Group and the board of the outcome of the above risk management work undertaken. In addition to the above process, the Advent Underwriting Limited auditcommittee, through the operation of internal audit, provides oversight as to theeffectiveness of risk management within the organisation. The internal audit function is responsible for providing independent assuranceon the adequacy and effectiveness of the risk management framework and internalcontrols. This is provided by means of a risk based programme of work whichreviews key risks and the operation of controls in those areas together, wherenecessary with recommendations for improvement. Financial risk management objectives The Group is exposed to financial risk through its financial assets, financialliabilities, reinsurance assets and policyholder liabilities. In particular, thekey financial risk is that the proceeds from financial assets are not sufficientto fund the obligations arising from policies as they fall due. The mostimportant components of this financial risk are interest rate risk, currencyrisk, credit risk and liquidity risk. Interest rate risk Interest rate risk arises primarily from investments in fixed interestsecurities. In addition, to the extent that claims inflation is correlated tointerest rates, liabilities to policyholders are exposed to interest rate risk.The Group mitigates interest rate risk by maintaining the investment portfolioin short-dated fixed interest securities, continually monitoring the averageduration of the funds held. In addition, a large part of the cash portfolio isheld in short-dated fixed interest deposits with little exposure to interestrate changes. The Group is also exposed to interest rate risk though its floating rateunsecured subordinated and senior loan notes. The US dollar denominated notescoupon is calculated by reference to USLIBOR, while the euro denominated notescoupon is calculated by reference to EURIBOR, and therefore the Group is exposedto fluctuations in both USLIBOR and EURIBOR. Currency risk The Group is exposed to currency risk in respect of liabilities under policiesof insurance and long term debt denominated in currencies other than Sterling.The most significant currencies to which the Group is exposed are the US dollarand the euro. The Group seeks to mitigate the risk by matching the estimatedforeign currency denominated liabilities with assets denominated in the samecurrency. Credit risk Credit risk is the risk that a counterparty will be unable to pay amounts infull when due. Key areas where the Group is exposed to credit risk are: - exposure to corporate bonds, - reinsurers' share of insurance liabilities, - amounts due from reinsurers in respect of claims already paid, - amounts due from insurance contract holders, and - amounts due from insurance intermediaries. The Group places limits on its exposure to a single counterparty, or groups ofcounterparty, and to geographical and industry segments. Reinsurance is used to manage insurance risk. This does not, however, dischargethe Group's liability as an insurer. If a reinsurer fails to pay a claim, theGroup remains liable for the payment to the policyholder. The creditworthinessof reinsurers is considered on an quarterly basis by reviewing their financialstrength prior to finalisation of any contract. In addition, the recent paymenthistory of reinsurers is used to update the reinsurance purchasing strategy. Liquidity risk Liquidity risk is the risk that cash may not be available to pay obligationswhen due at a reasonable cost. The Board sets limits on the minimum proportionof maturing funds available to meet such calls and on the minimum level ofborrowing facilities that should be in place to cover anticipated liabilitiesand unexpected levels of demand. Business Continuity Advent has in place business continuity and disaster recovery plans which arereviewed and tested regularly to ensure they meet with Advent's current businessrequirements. In the event of loss of the Lloyd's building and/or the Group's main offices,contingency plans exist to relocate its commercial activities. The Group hasfully functional dedicated offices available for this purpose and also hassystems in place to allow staff to work from their homes should the need arise. Statement of Directors' Responsibilities Company law requires the Directors to prepare Accounts for each financial yearwhich give a true and fair view of the state of affairs of the Company and theGroup and of the profit or loss of the Group for that period. In preparingthose Accounts the Directors are required to: • select suitable Accounting Policies and then apply them consistently, with the exception of changes arising on the adoption of new accounting standards in the year; • make judgements and estimates that are reasonable and prudent; • state whether applicable Accounting Standards have been followed, subject to any material departures disclosed and explained in the Accounts; • prepare the Accounts on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors confirm that they have complied with the above requirements inpreparing the financial statements. The Directors are responsible for maintaining proper accounting records whichdisclose with reasonable accuracy at any time the financial position of theCompany and the Group and to enable them to ensure that the Accounts comply withthe Companies Act 1985. They are also responsible for safeguarding the assets ofthe Company and the Group and hence for taking reasonable steps for theprevention and detection of fraud and other irregularities. Independent Auditor's Report to the Members of Advent Capital (Holdings) PLC We have audited the group and parent Company financial statements (the "financial statements") of Advent Capital (Holdings) PLC for the year ended 31December 2005 which comprise the Consolidated Profit and Loss Account, theConsolidated and Company Balance Sheets, the Consolidated Cash Flow Statementand the related notes. These financial statements have been prepared under theaccounting policies set out therein. Respective responsibilities of directors and auditors The directors' responsibilities for preparing the Annual Report and thefinancial statements in accordance with applicable law and United KingdomAccounting Standards (United Kingdom Generally Accepted Accounting Practice) areset out in the Statement of Directors' Responsibilities. Our responsibility is to audit the financial statements in accordance withrelevant legal and regulatory requirements and International Standards onAuditing (UK and Ireland). This report, including the opinion, has been preparedfor and only for the Company's members as a body in accordance with Section 235of the Companies Act 1985 and for no other purpose. We do not, in giving thisopinion, accept or assume responsibility for any other purpose or to any otherperson to whom this report is shown or into whose hands it may come save whereexpressly agreed by our prior consent in writing. We report to you our opinion as to whether the financial statements give a trueand fair view and are properly prepared in accordance with the Companies Act1985. We also report to you if, in our opinion, the Report of the Directors isnot consistent with the financial statements, if the Company has not kept properaccounting records, if we have not received all the Information and explanationswe require for our audit, or if information specified by law regardingdirectors' remuneration and other transactions is not disclosed. We read other information contained in the Annual Report, and consider whetherit is consistent with the audited financial statements. This other informationcomprises only the Chairman's Statement, the Report of the Directors, theCorporate Governance Report and the Remuneration Committee Report. We considerthe implications for our report if we become aware of any apparent misstatementsor material inconsistencies with the financial statements. Our responsibilitiesdo not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing(UK and Ireland) issued by the Auditing Practices Board. An audit includesexamination, on a test basis, of evidence relevant to the amounts anddisclosures in the financial statements. It also includes an assessment of thesignificant estimates and judgments made by the directors in the preparation ofthe financial statements, and of whether the accounting policies are appropriateto the group's and Company's circumstances, consistently applied and adequatelydisclosed. We planned and performed our audit so as to obtain all the information andexplanations which we considered necessary in order to provide us withsufficient evidence to give reasonable assurance that the financial statementsare free from material misstatement, whether caused by fraud or otherirregularity or error. In forming our opinion we also evaluated the overalladequacy of the presentation of information in the financial statements. Opinion In our opinion the financial statements: - give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the group's and the parent Company's affairs as at 31 December 2005 and of the group's loss and cash flows for the year then ended; and - have been properly prepared in accordance with the Companies Act 1985. PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors London 30 March 2006 The maintenance and integrity of the Advent Capital (Holdings) PLC website isthe responsibility of the directors; the work carried out by the auditors doesnot involve consideration of these matters and, accordingly, the auditors acceptno responsibility for any changes that may have occurred to the financialstatements since they were initially presented on the website. Legislation in the United Kingdom governing the preparation and dissemination offinancial statements may differ from legislation in other jurisdictions. CONSOLIDATED PROFIT AND LOSS ACCOUNT GENERAL BUSINESS TECHNICAL ACCOUNT Year ended 31 December 2005 Note 2005 2004 Restated £'000 £'000 Earned premiums, net of reinsurance Gross premiums written 2 100,550 74,749 Outward reinsurance premiums (37,601) (11,015) Net premiums written 62,949 63,734 Change in the gross provision for unearned premiums 1,990 6,959 Change in the provision for unearned premiums, reinsurers' share 131 (1,472) Earned premiums, net of reinsurance 65,070 69,221 Allocated investment return transferred from the non-technical account 4 4,172 2,614 Total technical income 69,242 71,835 Claims incurred, net of reinsurance Claims paid - gross amount (91,277) (68,134) - reinsurers' share 31,763 12,195 (59,514) (55,939) Change in the provision for claims - gross amount (110,424) 2,841 - reinsurers' share 45,728 1,784 (64,696) 4,625 Claims incurred, net of reinsurance (124,210) (51,314) Net operating expenses 5 (18,958) (18,753) Total technical charges (143,168) (70,067) Balance on the technical account for general business 6 (73,926) 1,768 Consolidated Profit and Loss Account Non Technical Account Year ended 31 December 2005 Note 2005 2004 Restated £'000 £'000 Balance on the general business technical account 6 (73,926) 1,768 Investment income 4 7,743 6,613 Investment expenses and charges 4 (813) (1,169) Unrealised losses on investments (316) (941) Allocated investment return transferred to the general business 4technical account (4,172) (2,614) Other income 7 1,915 4,563 Other charges 8 (5,222) (3,705) Profit/ (loss) on ordinary activities before tax (74,791) 4,515 Tax on profit/ (loss) on ordinary activities 11 22,263 (1,813) Profit/(loss) on ordinary activities after tax (52,528) 2,702 Dividends 13 (2,896) (2,896) Profit and loss account brought forward 29,281 29,475 Profit and loss account carried forward (26,143) 29,281 The profit/(loss) above is from continuing operations. There are no recognised gains or losses other than the result stated above. Consolidated Balance Sheet At 31 December 2005 Note 2005 2004 Restated £'000 £'000 Assets Intangible assets 15 5,344 6,002 Investments Debt securities and other fixed income securities 16 109,024 94,556 Deposits with credit institutions 16 2,148 5,276 111,172 99,832 Deposits with cedants 10 17 Reinsurers' share of technical provisions Provision for unearned premiums 24 2,331 2,200 Claims outstanding 24 94,073 41,088 96,404 43,288Debtors Debtors arising out of direct insurance operations- Intermediaries 1,143 778 Debtors arising out of reinsurance operations 63,794 45,902 Deferred tax 12 29,214 6,941 Other debtors 17 6,977 2,450 101,128 56,071Other assets Tangible assets 18 1,050 1,485 Cash at bank 19 102,795 57,935 Overseas deposits 3,813 4,352 107,658 63,772Prepayments Accrued interest 4,713 3,904 Deferred acquisition costs 3,311 3,583 Prepaid expenses 427 1,015 8,451 8,502 Total assets 430,167 277,484 Consolidated Balance Sheet continued At 31 December 2005 Note 2005 2004 Restated £'000 £'000 Liabilities and reserves Called-up share capital 20 10,981 26,331 Share premium account 22 31,759 - Profit and Loss account 22 (26,143) 29,281 Capital redemption reserve 22 21,065 - Other reserves 22 (3,081) (3,081) Total shareholders' funds 23 34,581 52,531 Technical provisions Provision for unearned premiums 24 15,689 13,699 Claims outstanding 24 328,487 191,925 344,176 205,624 Deposits received from reinsurers 99 1,165 Long term debt 25 27,104 - Creditors Creditors arising out of direct insurance operations 120 290 Creditors arising out of reinsurance operations 21,039 9,822 Other creditors including taxation and social 26 2,266 7,250security 23,425 17,362 Accruals and deferred income 782 802 Total liabilities 430,167 277,484 Approved by the Board on 30 March 2006 Company Balance Sheet At 31 December 2005 Note 2005 2004 Restated £'000 £'000 Fixed assets Investments in Group undertakings 28 14,428 14,428 Investments 16 1,672 - Current assets Amounts owed by Group undertakings 62,730 38,567 Other debtors 430 150 Cash at bank 19 84,186 13,695 147,346 52,412 Creditors: amounts falling due within one year Amounts owed to Group undertakings 9,806 - Other creditors including taxation and social security 27 238 191 10,044 191 Net current assets 137,302 52,221 Total assets less current liabilities 153,402 66,649 Creditors: amounts falling due after one year Long term debt 25 27,104 - Provisions for liabilities and charges 26 - 25,825 Net assets 126,298 40,824 Capital and reserves Called up share capital 20 10,981 26,331 Share premium account 22 31,759 - Profit and loss account 22 62,493 14,493 Capital redemption reserve 22 21,065 - Total shareholders' funds 23 126,298 40,824 Approved by the Board on 30 March 2006 Consolidated Cash Flow Statement Year ended 31 December 2005 Note 2005 2004 £'000 £'000 Net cash outflow from operating activities 29 (3,382) (8,675) Returns on investments and servicing of finance Interest received 1,120 1,655 Interest paid on subordinated loan notes (996) - 124 1,655 Taxation Corporation tax paid (72) (46) Overseas tax paid (1,654) (3) (1,726) (49) Capital expenditure Payments to acquire tangible fixed assets (94) (650) Financing Issue of ordinary share capital 37,474 - Issue of subordinated loan notes 27,087 - 64,561 - Equity divided paid (2,896) (2,896) Net cash inflow/ (outflow) 56,587 (10,615) Cash flows were invested as follows: Increase/ (decrease) in cash holding 30 44,321 (3,606) Net portfolio investment Fixed income securities 15,401 (4,413) Deposits with credit institutions (3,128) (2,556) Deposits with cedants (7) (40) 12,266 (7,009) Net investment of cash flows 56,587 (10,615) NOTES TO THE ACCOUNTS 1. PRINCIPAL EXCHANGE RATES The principal exchange rates used in translating foreign currency assets,liabilities, income and expenditure in the preparation of these accounts were: 2005 2004 Period Period Period Period average end average end rate rate rate rate US dollar 1.82 1.72 1.83 1.92Euro 1.49 1.46 1.47 1.41Canadian dollar 2.21 2.01 2.38 2.30 2. SEGMENTAL ANALYSIS Gross Gross Gross Net Reinsurance premiums premiums claims operating balance written incurred expenses £'000 £'000 £'000 £'000 £'0002005 Direct insuranceFire and other damage to 8,116 9,492 (9,598) (1,833) 5,826propertyMarine aviation and 1,553 1,428 (6,851) (579) 4,149transportThird party liability 760 764 (4,421) (209) 140Other 1,096 1,784 (1,687) (392) 45 11,525 13,468 (22,557) (3,013) 10,160Reinsurance 89,025 89,072 (179,144) (15,945) 29,854 Total 100,550 102,540 (201,701) (18.958) 40,014 Gross Gross Gross Net Reinsurance premiums premiums claims operating balance written earned incurred expenses £'000 £'000 £'000 £'000 £'0002004 (restated) Direct insurance Fire and other damage to 7,766 9,331 (8,706) (2,658) 3,176property Marine aviation and 1,900 5,699 (2,703) (6,138) (569)transport Third party liability 38 967 82 (165) (911) Other 1,305 890 (102) (418) (227) 10,933 16,887 (11,429) (9,379) 1,469 Reinsurance 63,816 64,821 (53,864) (9,374) 23 Total 74,749 81,708 (65,293) (18,753) 1,492 The reinsurance balance represents the credit/ (charge) to the technical accountfrom the aggregate of all items relating to reinsurance outwards. All premiums are written in the United Kingdom. 3. 2005 Hurricanes The 2005 Hurricanes, Katrina, Rita and Wilma, have had a material effect on theGroup's result for the year ended 31 December 2005. The net impact of theclaims arising from these losses, excluding the premium income receivable on theoriginal policies, is as follows: £'000Claims Gross claims 167,436 Reinsurers' share (74,089) Net claims 93,347 Reinstatement premiumsInward reinstatements (23,944)Outwards reinstatements 10,343 Net reinstatement premiums (13,601) Net cost of hurricanes 79,746 In establishing the above net loss figures, the procedures for assessing theimpact of major losses as described in the Accounting Policies set out abovehave been followed. This has entailed an assessment of all the latest lossinformation from cedants together with other market information currentlyavailable to the directors. As with any estimate, there will always be an element of uncertainty regardingthe total provision for outstanding claims. The size of the 2005 hurricaneclaims in total, and in particular those arising from Hurricanes Katrina, due toits size, and Wilma, due to its lateness in the year, and the ability to collectthe amounts due from reinsurers, all increase that level of uncertainty. Inaddition, in respect of Hurricane Katrina, much of the reinsurance cover hasbeen exhausted so that any movement sin gross claims directly impact on the netcost to the Group. As a result, the losses currently estimated by the directorsare inherently uncertain and may prove to be materially different to theeventual cost of these claims. 4. INVESTMENT RETURN 2005 2004 £'000 £'000 Investment income Income from financial investments 7,570 6,603 Gains on the realisation of investments 173 10 7,743 6,613Investment expenses and charges Investment management expenses (93) (129) Loss on the realisation of investments (720) (1,040) (813) (1,169) Unrealised losses on investments (316) (941) Total investment return 6,614 4,503 Analysed between Allocated investment return transferred to the 4,172 2,614general business technical account Investment income included in the non-technical 2,442 1,889account Total investment return 6,614 4,503 5. NET OPERATING EXPENSES Acquisition costs (10,053) (12,557) Change indeferred acquisition costs (447) (19) Administrative expenses (4,315) (6,606) Profit/ (loss) on exchange (4, 143) 429 (18,958) (18,753) 6. BALANCE ON TECHNICAL ACCOUNT Under the annual basis of accounting the Group's share of the syndicates'technical accounts by years of account has been accounted for as follows: Year ended 31 December 2005 2004 2003 2002 2001 £'000 £'000 £'000 £'000 £'000Syndicate 780 - Non MarineUnderwriting Year of Account2005 - open (64,412) - - - -2004 - open (14,867) (5,032) - - -2003 - closed 4,850 9,533 19,358 - -2002 - closed - 1,989 4,217 13,673 -2001 - closed - (745) (286) (7,976) (17,196) Balance on technical account (74,429) 5,745 Syndicate 2 - MarineUnderwriting Year of Account2002 - run-off 690 (2,294) 2,776 5,987 -2001 - run-off (253) (559) (4,017) (1,090) (14,904) Balance on technical account 437 (2,853) Syndicate 506 - Non-MarineUnderwriting Year of Account2001 - closed Balance on technical account 66 (1,124) (975) 2,859 (12,883) Total balance on technical account (73,926) 1,768 The figures above exclude profit commission and agency fees payable to theGroup's managing agency. 7. OTHER INCOME 2005 2004 £'000 £'000 Other income attributable to the Group's managing agency business: Managing Agency fees 595 849 Profit commission 822 3,178 Recharges to Syndicates 478 463 Other 20 73 1,915 4,563 8. OTHER CHARGES Included within Other Charges are: Amortisation of Syndicate Capacity costs (Note 13) 140 140 Amortisation of goodwill (Note 13) 518 518 Finance charges 890 890 Depreciation of tangible fixed assets (Note 16) 529 688 Auditors' remuneration: Audit PricewaterhouseCoopers LLP 190 - CLB Littlejohn Frazer - 43 Mazars - 8 Other PricewaterhouseCoopers LLP 10 - CLB Littlejohn Frazer - taxation - 15 The element of the audit fee relating to the Company was £120,000 (2004:£6,500). In addition to the above, PricewaterhouseCoopers LLP received fees of £380,000for acting as the Group's Reporting Accountants in connection with the placingof share and admission to the Alternative Investment Market (AIM) in June 2005. 9. STAFF COSTS (including Directors) 2005 2004 £'000 £'000 Wages and salaries 4,088 6,261 Social security costs 498 776 Other pension costs 526 553 5,112 7,590 Recharged to third party capital (2,037) (3,495) 3,075 4,095 Other pension costs are in respect of money purchase schemes and personalpension arrangements. Outstanding contributions at 31 December 2005 were£39,677 (2004: £31,110). The average number of persons, including executive directors, employed by theGroup during the year was: 2005 2004 Management 3 3 Finance 9 9 Underwriting 14 14 Claims and Reinsurance 7 8 Compliance 3 3 IT 5 5 Administration 5 5 46 47 10. DIRECTORS' EMOLUMENTS 2005 2004 £'000 £'000 Aggregate emoluments 809 1,733 Fees 100 90 Fees payable to third parties 22 25 Contribution to money purchase pension schemes 79 67 1,010 1,915 Recharged to third party capital (316) (855) 694 1,060 Number of Directors with accrued benefits under moneypurchase scheme 2 2 Highest paid Director Emoluments (including benefits in kind) 302 701 Contribution to money purchase pension schemes 59 47 361 748 Recharged to third party capital (127) (609) 234 139 11. TAX ON PROFIT ON ORDINARY ACTIVITIES 2005 2004 Restated £'000 £'000 Analysis of charge in period Current tax: UK Corporation Tax on profits of the period - 66 Adjustments in respect of previous periods 10 45 10 111 Foreign Tax - 2,003 Total current tax 10 2,114 Deferred Tax: Origination and reversal of timing differences (22,273) (301) Tax on profit/ (loss) on ordinary activities (22,263) 1,813 Factors affecting tax charge for the period Profit/ (loss) on ordinary activities before tax (74,791) 4,515 Profit/ (loss) on ordinary activities multiplied by standard rate ofcorporation tax in the UK of 30% (22,437) 1,354 Effects of: Expenses not deductible for tax purposes (primarily goodwill) (187) 181 Utilisation of tax losses 46 - Capital allowances less than/ (in excess of) depreciation 5 15 Underwriting results taxable when declared 29,570 (14,885) Election to disclaim technical provisions for tax purposes (7,837) 15,831 Other timing differences 840 (658) Net foreign tax suffered - 231 Adjustments in respect of previous periods 10 45 10 2,114 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 £18,776,000 (2004: liability £11,025,000)has been recognised on annually accounted technical results. The Group'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. It is intended that electionswill be made as permitted by the regulations to disclaim until future periodstax deductions in respect of technical provisions. Deferred tax is onlyrecognised on the amounts disclaimed to the extent that forecasts show that taxdeductions will be utilised in the foreseeable future. A deferred tax asset of£10,439,000 (2004: £18,559,000) has been recognised on elections to disclaimtechnical provisions. The Group suffers US tax on its share of syndicated deemed US underwritingprofits. This tax is recoverable to the extent that UK tax arises on taxablesyndicate profits for the appropriate years of account. The Group expects tosuffer US tax on its share of syndicate deemed US underwriting profits for the2003 year of account. Provision has been made for the Group's liability to UStax on the profits for this years. Some US tax suffered will be irrecoverabledue to the difference between UK and US tax rates and the difference between thetiming of US and UK syndicate profits for tax purposes. No US tax has beenwritten off during the year (2004: £228,000). 12. DEFERRED TAX 2005 2004 £'000 £'000 Group Deferred tax asset in respect of decelerated capital allowances: 38 65 Deferred tax asset in respect of technical provisions disclaimed: 10,439 18,559 Deferred tax asset/ (liability) in respect of underwritingresults to be declared: Underwriting Year of Account2001 57 1,2482002 (207) (8,158)2003 (7,048) (5,811)2004 6,220 1,6962005 19,754 - Deferred tax liability in respect of other timing differences (39) (658) 29,214 6,941 Deferred tax asset at 1 January 2005 6,941 Deferred tax charge in profit and loss account (Note 10) 22,273 Deferred tax asset at 31 December 2005 29,214 As required by FRS19 Accounting for Deferred Taxation, the Directors have provided for adeferred tax asset in respect of underwriting losses as they regard it as more likely than notthat there will be suitable future profits available to utilise these losses. Therecordability of the deferred tax asset is reviewed annually and its carrying value adjustedas appropriate. 2005 2004 £'000 £'000 Company Deferred tax asset in respect of decelerated capital allowances 25 35 Deferred tax asset at 1 January 2005 35 Deferred tax charge in profit and loss account for period (10) Deferred tax asset at 31 December 2005 25 13. EQUITY DIVIDENDS 2005 2004 £'000 £'000 Dividend paid - 2.75p per New Ordinary share (2004: 2.75p) 2,896 2,896 14. 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 Group Accounts. The profit for the financial year before dividends dealt with in the Accounts ofthe Parent Company was £50,896,830 (2004: profit £11,563,305). 15. INTANGIBLE FIXED ASSETS Goodwill on Auction capacity Total acquisition £'000 £'000 £'000 CostAt 1 January and 31 December 2005 9,858 2,193 12,051 AmortisationAt 1 January 2005 5,192 857 6,049Charge for the year 518 140 658 At 31 December 2005 5,710 997 6,707 Net Book Value At 31 December 2005 4,198 1,196 5,344 At 31 December 2004 4,666 1,336 6,002 16. FINANCIAL INVESTMENTS 2005 2004 £'000 £'000Group Carrying value Debt securities and other fixed income securities 109,024 94,556 Deposits with credit institutions 476 5,276 Deposits with credit institutional - corporate 1,672 - 111,172 99,832 Purchase Price Debt securities and other fixed income securities 109,304 95,325 Deposits with credit institutions 476 5,276 Deposits with credit institutional - corporate 1,672 - 111,452 100,632Company Deposits with credit institutional 1,672 - All financial investments are held by the Group syndicates. All debt securitiesand other fixed income securities apart from asset-backed securities are listedon recognised stock exchanges. 17. OTHER DEBTORS 2005 2004 £'000 £'000 Corporate other debtors 2,284 745 Syndicates other debtors 4,693 1,705 6,977 2,450 18. Tangible fixed assets Furniture, Computer Total fittings and equipment equipments £'000 £'000 £'000GroupBook costAt 1 January 2005 907 2,124 3,031Additions 25 69 94Disposals - (172) (172) At 31 December 932 2,021 2,953 DepreciationAt 1 January 2005 426 1,120 1,546Charges for the year 109 420 529Disposals - (172) (172) At 31 December 2005 535 1,368 1,903 Net Book ValueAt 31 December 2005 397 653 1,050At 31 December 2004 481 1,004 1,485 19. CASH AT BANK 2005 2004 £'000 £'000GroupCorporate cash at bank 2,027 15,227Syndicates' cash at bank 13,558 9,234Corporate funds held by Lloyd's 87,210 33,474 102,795 57,935 CompanyCash at bank 125 11,936Funds held by Lloyd's 84,061 1,759 84,186 13,695 The Funds held by Lloyd's (FAL) represent monies deposited with the Corporationof Lloyd's (Lloyd's) to support the Group's underwriting activities. The Groupis party to a Lloyd's deposit trust deed which gives Lloyd's the right to applythese monies in settlement of any claims arising from the Group's underwritingat Lloyd's. On 29 November 2005, the Company deposited £82 million in fundsheld by Lloyd's to support Syndicate 780's 2006 underwriting account from theproceeds of its debt and equity offerings competed on 3 June 2005, to supportSyndicate 780's 2006 underwriting account. In addition to the Group's FAL of £87.2 million at 31 December 2005, a majorshareholder, Fairfax Financial Holdings Limited (Fairfax), has deposited Fundsat Lloyd's of £110 million at 31 December 2005 to support the Group'sunderwriting for the 2001 to 2005 underwriting years pursuant to a FundingAgreement dated 16 November 2000. Any underwriting profits arising from the useof the Fairfax FAL are receivable by the Group which is also responsible forthe payment of any losses arising. In January 2006, the Company deposited an additional £38 million funds held byLloyd's from the net proceeds of its debt and equity offerings completed on 6January and 16 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. Syndicate 780 announced a cash call as the 2005 year ofaccount payable 30 June 2006. The Group's share of the cash call amounts to£36.9 million which will be drawn from its funds held by Lloyd's deposited inJanuary 2006. 20. CALLED-UP SHARE CAPITAL Authorised Allotted, Called Up and Fully Paid 2005 2004 2005 2004 £'000 £'000 £'000 £'000 Ordinary shares of 5p each 16,555 - 10,981 - Ordinary shares of 25p each - 29,112 - 26,331 Number of shares 331,109,320 116,448,908 219,608,771 105,323,057 Share capital reorganisation On 17 May 2005 each issued Ordinary Share of 25 pence of the Company wasconverted and subdivided into one New Ordinary Share of 5 pence and one DeferredShare of 20 pence and each existing unissued Ordianry Share of 25 pence in thecapital of the Company was converted and subdivided into five New OrdinaryShares of 5 pence, each New Ordinary Share and each Deferred Share having thesame rights and being subject to the restrictions set out in the New Articles ofAssociation of the Company adopted on the same date. The authorised sharecapital of the Company was increased to £37,620,077 on the same date by thecreation of 170,157,000 Ordinary Shares of 5 pence each, such new shares to havethe rights attached thereto in the New Articles of Assocation of the Company.As a result of the share capital reorganisation, £21,064,611 was transferredfrom called-up share capital to capital redemption reserve. On 26 May 2005, the Deferred Shares were acquired by the Company and cancelled,as a result of which the Company's authorised share capital reduced by£21,064,611 from £37,620,077 to £16,555,466. Share issue 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 for cash proceeds of £40 million less expenses of issue of£2.53 million, of which £5.714 million has been included in called-up sharecapital and £31.755 million has been included in the share premium incomeaccount. Pursuant to the Placing Agreement the Company has granted to Numis an optionsubscribe for up to 2,196,087 Ordinary Shares at 35p per share, exercisable atany time, in whole or in part, up to 3 June 2010. Share Option Schemes In the periods included in this report, the Company operated two share optionsschemes. The 1998 Scheme, which was open to all employees, and the 1999Executive Share Option Scheme. Both schemes were superseded in 2005 by the newAdvent Share Option Plans. All option holders under the 1998 were sent a letterof cancellation by the Company on 21 April 2005 and have acknowledgedcancellation of that scheme. No options were exercised under this scheme. Thetwo option holders under the 1999 Scheme waived their rights under that Schemeon 4 May 2005. 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"). As at 3 June 2005, options over an aggregate of 4,629,000 Ordinary Shares wereawarded to Directors and Employees of the Advent Group, pursuant to the AdventShare Option Plans. These awards have been granted at the placing price of 35pper share and are not subject to performance conditions. The 2,323,996 options granted under the Approved Scheme have an exercise periodbetween three and ten years from the date of grant, whereas the 2,305,004options granted under the Unapproved Scheme have an exercise period between oneand ten years following the date of grant. Post balance sheet event On 6 January 2006, the Company issued 150,000,000 New Ordinary Shares of 5 penceeach at 20 pence per share, pursuant to a placing of shares for cash proceeds of£30 million less expenses of issue of £0.7 million. The Company currently has369,608,771 allotted, called-up and fully paid New Ordinary Shares outstanding. 21. 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. 2005 2004 £'000 £'000 Profit/ (loss) for the period (52,528) 2,702 Weighted average number of shares in issue 171,702,705 105,323,057 Basic and diluted earnings per share (30.6)p 2.6p 22. RECONCILIATION OF MOVEMENTS IN RESERVES Share Profit & Capital Merger Total Premium Loss Redemption Account Account Account Reserve £'000 £'000 £'000 £'000 £'000GroupAt 1 January 2005 - 26,385 - (3,081) 23,304Restatement under FRS21 - 2,896 - - 2,896 - 29,281 - (3,081) 26,200 Profit/(loss) for the year - (52,528) - - (52,528)Dividends paid - (2,896) - - (2,896)Share issue 31,759 - - 31,759Share capital reorganisation - - 21,065 - 21,065At 31 December 2005 31,759 (26,143) 21,065 (3,081) 22,983 The merger account arises through the consolidation of Advent UnderwritingLimited, which was acquired in 1999. Profit & Loss Account £'000Company At 1 January 2005 11,597Restatement under FRS21 2,896 14,493 Profit for the year (50,896)Dividends paid (2,896) At 31 December 2005 (62,493) 23. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS 2005 2004 Restated £'000 £'000Group Profit/ (loss) for the year (52,528) 2,702Dividends paid (2,896) (2,896)Share issue 37,474 -Merger reserve adjustments - (22) Net addition/ (reduction) to shareholders' funds (17,950) (216)Opening shareholders' funds 52,531 49,851Restatement under FRS21 - 2,896Closing shareholders' funds 34,581 52,531 2005 2004 £'000 £'000 Company Profit/ (loss) for the year (50,896) 11,563Dividends paid (2,896) (2,896)Share issue 37,474 - Net addition shareholders' funds 85,474 8,667Opening shareholders' funds 40,824 29,261Restatement under FRS21 - 2,896 Closing shareholders' funds 126,298 37,928 24. TECHNICAL PROVISIONS Provision for Claims Total unearned premiums outstanding £'000 £'000 £'000GrossAt 1 January 2005 (restated) 13,699 191,925 209,921Exchange adjustments - 25,465 25,465Movements in provisions 1,990 111,097 108,790At 31 December 2005 15,689 328,487 344,176 Reinsurers' shareAt 1 January 2005 2,200 41,088 43,288Exchange adjustments - 7,262 7,262Movement in provisions 131 45,728 45,859At 31 December 2005 2,331 94,073 96,404 NetAt 31 December 2005 13,358 234,414 247,772At 31 December 2004 (restated) 15,796 150,837 166,633 The net claims outstanding balance is further analysed between notifiedoutstanding claims and incurred but not reported claims (IBNR) below: 2005 2004 £'000 £'000 Notified outstanding claims 146,463 93,584Claims incurred but not reported 88,251 57,253Claims outstanding 234,414 150,837 25. LONG TERM DEBT 2005 2004 £'000 £'000 Subordinated loan notes 27,104 - On 3 June 2005, the Company issued subordinated loan notes of US$34m and Euro12m (the "USD Notes" and "Euro Notes" respectively), due 3 June 2035 andcallable by the Company at any time, in whole or in part, after 3 June 2010.Expenses incurred in connection with the issue of the debt were to £0.9 million. The Euro Notes bear interest at 3 month EURIBOR pus 3.85% and the USD Notes at 3month USD Libor plus 3.9%. Payment of interest may, at the option of theCompany, be deferred for up to 20 consecutive quarters. The Notes rank on a winding-up of the Company in priority to distributions onall classes of share capital 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). At 31 December 2005 the Notes were listed on the Irish Stock Exchange. Postyear end they were listed on the Channel Islands Stock Exchange. Post sheet balance sheet On 16 January 2006, the Company issued senior subordinated loan notes of US$26million (£15.1 million), (the "Senior Notes"), due 15 January 2026 and callableby the Company at any time, in whole or in part, after 16 January 2011.Expenses incurred in connection with the issue of debt were £0.4 million. The Senior Notes bear interest at 3 month USD Libor plus 4.5%. The Senior Notes bear 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 Senior Notes are listed on the Channel Islands Stock Exchange. 26. PROVISIONS FOR LIABILITIES AND CHARGE Company At 1 January Profit & Loss Utilisation in At 31 2005 Charge/ Year December (credit) 2005 £'000 £'000 £'000 £'000 Provision for undertaking lossesof subsidiary undertaking 25,925 (25,925) - - 27. OTHER CREDITORS 2005 2004 £'000 £'000GroupDue within one yearCorporation tax 3 65Other taxes 184 234Corporate other creditors 2,006 3,757Syndicate other creditors 73 3,194 2,266 7,250 CompanyCorporation tax 3 65Other taxes 39 65Other creditors 2 24Acrruals 194 37 238 191 28. INVESTMENT IN GROUP UNDERTAKINGS Subsidiary Undertaking £'000Company costAt 1 January 2005 and 31 December 2005 14,428 On 22 April 2005 100% of the voting 'A' Share of Advent (Strategic Investments)Limited (ASIL), were transferred to Advent Capital (Holdings) PLC. Prior tothis date the Company owned only non-voting shares and ASIL was accounted for asa quasi subsidiary. ASIL is registered in England and Wales. Advent (Strategic Investments) Limited acts as an investment Company owingshares 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 PLC 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, an intermediate holdingcompany registered in England & Wales. 29. RECONCILIATION OF PROFIT BEFORE TAX TO NET CASHINFLOW / (OUTFLOW) FROM OPERATING ACTIVITIES 2005 2004 £'000 £'000 Profit/ (loss) before tax (74,791) 4,515(Increase)/decrease in debtors and prepayments (17,854) 22,799Increase/ (decrease) in creditors and accruals 6,440 (16,358)Increase/ (decrease) in net technical provisions 81,139 (19,779)Debt interest 1,153 -Foreign tax expense 96 -Investment income (1,085) (1,889)Unrealised investment return 316 691Depreciation 529 688Amortisation of goodwill 658 658Amortisation of debt issue costs 17 - (3,382) (8,675) 30. MOVEMENT IN CASH HOLDINGS At 1 January 2005 Cash Flow At 31 December 2005 £'000 £'000 £'000 Corporate funds held by Lloyd's 33,474 53,736 87,210 Corporate cash at bank 15,277 (13,200) 2,027 Syndicates' cash at bank 9,234 4,324 13,558 Syndicates' overseas deposits 4,352 (539) 3,813 62,287 44,321 106,608 31. ASSETS AND LIABILITIES HELD BY SYNDICATE The consolidated balance sheet includes the following assets and liabilitiesheld by the syndicates on which the group participates. These assets aresubject to Lloyd's trust deeds for the benefit of policyholders. 2005 2004 £'000 £'000AssetsFinancial investments 110,117 99,832Deposits with cedants 10 17Reinsurers' share of technical provision 96,404 43,288Debtors arising out of direct insurance operations- Intermediaries 39,291 778Debtors arising out of reinsurance operations 25,646 45,902Other debtors 4,077 6,002Cash at bank 13,558 9,234Overseas deposits 3,813 4,352Accrued income 268 50Deferred acquisition costs 3,311 3,583Prepaid expenses 251 125 296,746 213,163 LiabilitiesTechnical provisions 344,176 209,921Deposits received from reinsurers 99 1,165Creditors arising out of direct insurance operations 120 290Creditors arising out of reinsurance operations 21,039 9,822Other creditors 73 3,194Accruals and deferred income 248 199 365,755 224,591 32. COMMITMENTS There were no capital commitments or authorised but uncontracted commitments atthe end of the financial year. The Group leases certain land and buildings onshort-term operating leases, the minimum annual commitments being: On leases expiring within two years: £25,000 On leases expiring within five years: £nil, the Group benefiting from an initialrent free period which expires in 2006. 33. RELATED PARTIES Accommodation costs of £13,250 (2004: £4,700) for the Wickford office were paidto Charlbury Investments Limited in accordance with the terms of the lease.B.F. Caudle is a director of Charlbury Investments Limited. Syndicate 780 accepted inwards reinsurance business from and placed outwardsreinsurance business with, companies that are deemed to be related parties ofAdvent Capital (Holdings) PLC by virtue of the shareholding of Fairfax FinancialHoldings Limited (Fairfax) and certain of its subsidiaries. All transactionswith these parties were conducted at arms length and at normal commercial terms. Material transactions with related parties for the 2005 calendar year were asfollows: The Group's share of premiums ceded by Syndicate 780 to related parties underquota share arrangements was £2,265,758 (2004: £817,981). The Group's share ofreinsurance recoveries from related parties under quota share arrangements was£5,981,208 (2004: £726,200). As disclosed in Note 19, Fairfax has deposited Funds at Lloyd's to support theGroup's underwriting. On 22 April 2005, John Towers transferred the two voting shares in Advent(Strategic Investments) Limited to Advent Capital (Holdings) Limited for £2. MrTowers is a director of Advent Underwriting Limited and Advent Group ServicesLimited. This information is provided by RNS The company news service from the London Stock Exchange

---

Related Shares:

ADV.L