15th Sep 2006 07:01
Novae Group PLC15 September 2006 For immediate release 15 September 2006 Novae Group PLC Results for the six months ended 30 June 2006 Highlights • Underlying profit before tax (excluding professional costs incurred in the scheme of arrangement and formation of new insurance company) £16.0 million (H1 2005: £27.7 million) • Annualised return on equity 26% (H1 2005: 40%) • Tangible net assets per share 30.0p (H1 2005: 38.2p) • Earnings per share 2.5p (H1 2005: 5.3p) • Combined ratio 83.8% (H1 2005: 71.9%) • David Henderson to be appointed as independent non-executive director and Chairman of Remuneration Committee Matthew Fosh, Chief Executive, today said: "It has been an important six months for us, during which we have turned Novaeinto a forward-facing business no longer dominated by the debilitating legacy ofits past. The formation of our new FSA-regulated insurance company achieved ourgoal of platform diversification. We are delivering profits in line with ourexpectations. Subject to catastrophe loss experience in the second half, weremain upbeat about the prospects for the year." Enquiries: Matthew Fosh, Novae Group PLC 020 7903 7300 Nick Miles, M:Communications 020 7153 1535 A presentation to analysts and shareholders is taking place this morning at10.00a.m. in the London Room, 9th Floor, Citypoint, 1 Ropemaker Street, EC2. This summary should be read in conjunction with the detailed announcement whichfollows. For immediate release 15 September 2006 Novae Group PLC Results for the six months ended 30 June 2006 Operating and financial review Overview The first half of 2006 has been a seminal period for Novae. The formation of Novae Insurance Company Limited ("NICL") achieved our strategicaim of creating a non-Lloyd's platform. Although we expect that over 75% of ourbusiness will continue to flow through the Group's Lloyd's operation over thenext three years, the formation of an FSA-regulated insurance company hasachieved our goal of platform diversification. The scheme of arrangement, rightsissue, new banking facilities and re-branding that accompanied NICL's formationwere each major steps. The philosophy of "one company, two platforms" is firmlyestablished. The March restructuring reflected the Board's desire to move from a strategy ofrehabilitation to one more focussed on future development. A transactionalsolution for the run off of the legacy business written in 2002 and priorremains under active review. The rating environment has been varied since last year's intense hurricaneactivity. On US catastrophe reinsurance, where substantial rate increases havebeen seen, the momentum continues to build. On the other hand rate reductionshave been commonplace in international property. Aviation reinsurance has shownstability despite a continuing benign claims environment in the first half. Wehave been reassured by Liability rates, including those within our Specialitysegment, which have shown greater stability since late 2005. Under these circumstances Novae has re-balanced its book, reducing exposure tosome more price-sensitive classes. We have looked at a number of organic growthopportunities during the period. In April the Group started to write an energyaccount at Lloyd's, which has turned out to be a well-timed move in light of thecurrent rating environment. We continue to review other growth opportunities. One of the issues considered by the Board in its annual review of effectivenessis its own composition and balance. As a result of this review, the Board hasconcluded that enhanced independent non-executive director representation is theimmediate priority. Following a formal process involving an external searchfirm, we are delighted to announce that David Henderson will be joining theBoard as an independent non-executive director. In addition he will becomeChairman of the Remuneration Committee, which is currently setting vestingtargets under the 2005 Long Term Incentive Plan. David, who is Chairman of Kleinwort Benson Private Bank Limited, has extensiveknowledge of the financial services sector and we look forward to thecontribution he will make. This appointment aside, the size and composition ofthe Board remains under review. Finally, the Board would like to acknowledge the exceptionally hard work ofNovae's staff and external advisers in the first half. Building a second, FSAinsurance company platform, and stabilising the business in the past threeyears, have been enormous achievements; but they have only been possible withthe industry, enthusiasm and skill of those who have worked tirelessly on theGroup's behalf. Operating review Highlights The ongoing business again had a strong first half. Underwriting profit from thecontinuing business was £26.8 million including an exchange gain of £0.2 millionon retranslation of non-monetary balances (2005: £43.3 million including anexchange gain of £6.0 million). Underwriting profit before exchange gains andlosses was thus £26.6 million compared to £37.3 million in the same period lastyear. The first half combined ratio for the ongoing business (calculated on an earnedpremium basis) was 83.8%, compared to 71.9% in the first half last year and95.2% for 2005 as a whole. US windstorm losses in the second half of 2005 added24.2% to the underlying combined ratio of 71.0%. The claims ratio for the firsthalf of 2006 was 53.3% (H1 2005: 37.9%). The movement in the claims ratio waslargely accounted for by a deterioration in the claims experience in the run offof the Fusion business (which was sold last year), the effect of buying run offcover in relation to Fusion and the US open market business and a lower level ofreserve releases from our Liability business than was recognised in the firsthalf last year. Profit before tax and prior to transaction costs relating to the scheme ofarrangement and formation of NICL was £16.0 million (2005: £27.7 million).Novae's profit before tax excluding transaction costs and exchange gains andlosses was £15.8 million compared to £21.7 million in the first half of 2005. After deducting non-recurring transaction costs of £1.5 million (2005: nil),reported profit before tax was £14.5 million (2005: £27.7 million). Someadditional professional costs will be incurred in the second half, but we expectthat total non-recurring transaction costs taken through the profit and lossaccount for the year as a whole will not exceed £2.0 million. NICL commenced trading on 1 July 2006, so made no contribution to theunderwriting performance in the first half. New and renewal business is nowbeing written by NICL and we remain committed to delivering in accordance withthe plan set out in our FSA submission. Strategic aims Novae's strategic aims are clear: to build and develop a specialist insurancebusiness diversified by product, by platform and by method of distribution. • We have re-balanced Novae's product range in the last year, reducing exposure to some more price-sensitive classes. We have made a controlled entry into the Lloyd's energy market and will consider other attractive business opportunities uncorrelated with our existing business. We will continue to pursue such initiatives in our goal of product diversification • The formation of NICL achieves our strategic aim of platform diversification. We have no current intention to form a third platform • Further progress was achieved in diversifying our methods of distribution. Income from our regional SME business and from our two regional offices grew steadily. We bound 1,506 individual risks on our evolving electronic platform in the first half, compared to 443 in the same period in 2005. Over 5% by value of our regional SME business is now transacted electronically Reporting structure We continue to report our underwriting results by segment, being Specialty,Property, Liability and Aviation & Marine. As we are managing the Group'sexposures on an overall basis this format will remain the case regardless ofwhether individual risks are written by the Lloyd's business or by NICL. We showseparately the financial results of the run off of the Discontinued Units(Liability Reinsurance, Healthcare and Third Party Liability). Underwriting review The rating environment was mixed in the first half. There was a notabledivergence between those lines of business affected by last year's US windstormlosses, particularly where reinsurance capacity is limited, and other classes. Asummary of our first half rating experience on our renewal book is set outbelow: Class 2000 2001 2002 2003 2004 2005 2006 H1 Specialty 100 125 212 281 292 266 249 Property 100 118 159 165 158 156 196 Liability 100 117 171 196 207 204 203 Aviation & Marine 100 132 284 304 295 281 285 Whole Account 100 123 193 228 230 217 223 The outstanding feature has been the scale of rate increase on propertyreinsurance business, which has gained momentum over the period. Notwithstandingthe absence of upward rating movement on non-US business, the overall effect wasan increase of 26% in rates in the first half for the Property segment as awhole. Specialty and Liability saw overall rate easing, after making allowance forestimated claims inflation, but the overall experience compared favourably withthe assumptions underlying our business plans. Aviation reinsurance has seenrate stability despite a benign claims experience. The Marine market has seenencouraging rate hardening, particularly in energy business. Overall renewal rate increases averaged 3% in the first half of the year. WithSpecialty renewals skewed towards the second half there could be some slippagein this overall figure, although if current trends are maintained we expect itto remain positive. Given normal loss experience the business will remainrobustly profitable at current rating levels. This does not, however, relieve usof the responsibility of thinking further ahead to 2007 and 2008. Specialty contributed an underwriting profit of £13.7 million (H1 2005: £2.9million). There was a welcome reduction in old year reserve deterioration,particularly from the inherited dollar professional indemnity book, so thehealthy profitability of business transacted in recent years is now beingreflected strongly in the performance of this segment. Property business contributed an underwriting profit of £3.4 million (H1 2005:£15.8 million). Additional reinsurance costs for Fusion and US open marketunits, both in run off, reduced profitability. In addition there wasdeterioration in the claims experience of the Fusion account and a modest impactfrom Australian cyclones. US windstorm experience in the second half will be akey determinant of the profitability of this segment for the year. Liability business contributed an underwriting profit of £3.5 million (H1 2005:£7.4 million). The Liability segment has again benefited from reserve releases,although these are less significant than in the first half of 2005. Aviation & Marine contributed an underwriting profit of £6.0 million (H1 2005£10.5 million). The continuing benign claims experience in the first half hasbeen a major driver behind segment profitability. Discontinued Units The Discontinued Units comprise Liability Reinsurance (or Casualty Treaty)business written in three different syndicates as well as the Healthcare andThird Party units. It has been the Liability Reinsurance business that has beenthe principal source of reserving challenges. In the first half of 2006 the Discontinued Units produced a loss beforeinvestment return of £6.9 million (H1 2005: £12.4 million loss), which wascharged against the Group's exceptional provision. During the first half nine ofthe nineteen large contracts were reviewed. Three of these contracts accountedfor the majority of the reserve deterioration in the period. Adverse variancebetween gross and net experience also contributed to the total as actual lossevents varied somewhat from the modelled profile. £20.2 million of the exceptional provision remains available to absorb anyfuture deterioration from the Discontinued Units. Historically, incurred claimshave slowed significantly in the sixth year from inception and accordinglyreserves have shown much greater stability with increasing maturity. At June2006 the 2000 Year of Account is 6.5 years old and the 1997 Year of Account is9.5 years old. Although uncertainty remains, the scale of the £20.2 millionremaining provision at this stage gives us some comfort on the ultimatedevelopment of the Discontinued Units. The cumulative financial impact of the Discontinued Units since 2001 is £187.1million, made up as follows: • 2001: £20.5 million• 2002: £18.6 million• 2003: £25.1 million• H1 2004: £39.5 million• H2 2004: £36.5million• H1 2005: £12.4 million• H2 2005: £27.6 million• H1 2006: £6.9 million This captures the extent of reserve deterioration which Novae has absorbed since2001 but excludes the costs of the Discontinued Business Unit and of providingthe regulatory capital required to support the run-off. If these items are addedto the £187.1 million reserve deterioration and the remaining unutilised £20.2million exceptional loss provision, the cumulative damage from the DiscontinuedUnits is of the order of £250 million. Business resources and group structure As at 30 June 2006 Novae had 201 employees (H1 2005: 323 including Fusion, 188on a like-for-like basis). The increase in underlying headcount reflects thecontinuing increase in the regulatory burden. At the same time London marketprocess reform is pushing many of the functions traditionally carried out bybrokers and bureaux back on to insurers. Following the scheme of arrangement and rights issue, a further structuralreorganisation resulted in two intermediate holding companies becomingredundant. Application to strike these companies off will be made shortly.Looking ahead we expect to have a group made up of 11 corporate entities,reduced from 61 three years ago. In June we announced plans to merge our managed syndicates, 1007 and 2147, toform a composite syndicate, 2107, for the 2007 year of account. This completesthe process of rationalisation from five managed syndicates. Novae will own atleast 94% of the capacity of the new syndicate (with 5% coming from thecorporate member subsidiary of a large reinsurer and the remaining 1% from 22traditional names). The outcome of our merger proposal depends on a final rulingfrom Lloyd's Capacity Transfer Panel later this month. It remains our intentionto acquire the remaining third party capacity if agreement can be reached withthe names' agents. The Group's employees and operating assets were transferred to a centralinfrastructure company in June as part of the "one company, two platforms"philosophy. Underwriting units are charged on a user pays basis regardless ofwhether they underwrite through Lloyd's or the insurance company. Outlook The outlook for the second half remains encouraging. The current book ofbusiness continues to perform in line with the Board's expectations. The resultfor the year will depend primarily on gross and net loss experience in thesecond half, and particularly any catastrophe loss activity. Financial review Highlights The focus in the first half was the transactional work around the formation ofNICL together with first time adoption of IFRS. In the second half we expect toconcentrate on further systems enhancements and additional reporting andregulatory work for Lloyd's and the FSA. Capital requirements Following the formation of NICL, regulatory capital is assessed at three levelswithin the Group. The Lloyd's business requires regulatory capital for its managing agency and,more significantly, its corporate member. The corporate member provided Funds atLloyd's of £296.1 million as at 30 June 2006. Following the first time adoptionof annual accounting by Lloyd's, the basis of the Funds at Lloyd's calculationhas changed. The movement between the December 2005 and June 2006 positions isset out below: £mAs at 31 December 2005:2006 capacity - 100% 360.0Novae share 337.9 Capital requirement as at 31 December 2005 279.1 Movement in capital requirement in the period 17.0 Capital requirement as at 30 June 2006 296.1 The movement in the capital requirement reflects, inter alia, the disposal ofFusion in November 2005 and the solvency deficit arising from the recognition,under Lloyd's new annual accounting regime, of 2005 US windstorm losses. Asprofits emerge from 2005 and prior years and contribute towards admissibleassets, we expect our Lloyd's capital requirement to fall. The Lloyd's capital requirement is currently met as follows: 30 June 31 December 2006 2005 £m £m Own assets 256.1 239.1Reinsurer letter of credit (Everest Re) 20.0 20.0Letter of credit facility (Lloyds TSB) 20.0 20.0 As at 30 June 2006 296.1 279.1 NICL's capital requirement is set by the FSA. However, as a stand aloneinsurance company it is commercially important for NICL to have a robust thirdparty credit rating. Following its initial capitalisation with £100 million ofequity, NICL's stand alone capital satisfies the FSA's requirements andattracted a rating of A- (Excellent) from AM Best. The Group will become subject to the provisions of the Insurance GroupsDirective ("IGD") following the formation of NICL. Under the IGD theconsolidated capital position will be assessed in relation to the FSA'saggregate minimum requirement. We continue to allocate capital based on ability to exceed the estimated pre taxweighted average cost of capital ("WACC"). The average WACC in the period was10.2% (2005: 12.2%). The hurdle rate, which is set at a premium to the WACC, was12.5% (2005: 15.0%). Annualised pre tax return on capital in the period was 20%; annualised pre-taxreturn on equity was 26%. The components of the return calculation are set outbelow: £m unless stated Equity capital Gross capital employed employed Operating profit 22.9 22.9Financing cost (6.9) -Underlying profit before tax 16.0 22.9 Average equity capital employed 122.4 122.4Average geared capital employed - 105.3Average capital employed 122.4 227.7Annualised pre tax return on capital employed 26% 20% H1 2005 comparative 40% 28%H1 2004 comparative 45% 27% We currently anticipate that financing costs (including letter of creditcharges) for the 12 month period to December 2006 will be around £15 million. Reinsurance asset As at 30 June 2006 reinsurers' share of gross claims was £452.9 million(December 2005: £561.5 million). Significant progress has again been made in collecting reinsurance and reducinghistoric arrears. This is in spite of an increase in reinsurance recoveriesfollowing US windstorm losses in 2005 and the settlement of major financialinstitutions claims. In the first six months of 2006, Novae processed andcollected a total of £124.2 million of reinsurance, equivalent to over £1million each working day. As at 30 June reinsurance collections over 12 months in arrears (net of excludeditems) were under £3 million, compared to over £18 million two years ago. Muchof the remaining balance is accounted for by a single London market reinsurer. Investment assets Our investment strategy remains conservative with very limited appetite formarket risk. Our solvency capital is invested in short duration investment gradebonds and certificates of deposit. 25% of our FAL requirement is invested indollars, hedging any reserve volatility in the Discontinued Units. The balanceof the FAL requirement and all of NICL's solvency capital are invested insterling. Insurance working capital is invested in the currencies in which itemerges, subject to the requirements to fund certain US and other overseasbusiness gross. As at 30 June 2006 our managers are forecasting 2006 total return on oursterling FAL of 4.3%; our dollar FAL of 4.9%; our insurance working capital of4.4% (sterling) and 4.2% (dollar); and NICL's investment assets, pro rated for afull 12 month period, of 4.3%. Claims and reserving For the ongoing business claims activity has focused on 2005 US windstorm lossesand the financial institutions account. A number of large and high profileclaims relating to WorldCom and Enron have now been settled. Other large claimsremain in negotiation, and we continue to monitor these very closely. The run off of the Discontinued Units is managed by the DBU and remains thesubject of close scrutiny from Lloyd's and the FSA. Our proactive approach toclaims management remains a key part of the strategy we have adopted to dealwith legacy issues. Significant progress continues to be made on the run offyears, with 24% of the population of lead claims over £1 million settled so farthis year. Cash flow and liquidity Cash outflow net of portfolio movements and the receipt of the rights issueproceeds was £13.0 million during the first half (2005: £16.1 million inflow).This reflected the application of the closed year profits from 2003 to meet acash call on the open 2002 years of account, together with an increase in ownFAL in June 2006. The net proceeds of the rights issue were received in June and£100 million was used to capitalise NICL through investment in short durationand investment grade bonds and certificates of deposit. Various bank facilities across the Group have been renewed or extended in thefirst half. As well as a £20 million letter of credit facility forming part ofthe capital base of the Lloyd's business, a $35 million catastrophe stand byline has been renewed and increased to $40 million. A separate £20 millionrevolving credit facility has been put in place at Group level. 15 September 2006 Consolidated unaudited income statementfor the six months ended 30 June 2006 Six months Six months ended ended Year ended 30 June 30 June 31 December 2006 2005 2005 Note £m £m £m Gross premium revenue 5 147.6 154.2 366.6Less premium ceded toreinsurers 5 (32.8) (42.8) (96.0) ------- ------- -------Net premium revenue 114.8 111.4 270.6 Fees and commission income 6 4.7 3.0 7.3Investment income 7 12.8 13.4 25.8 ------- ------- -------Total revenue (net ofreinsurance payable) 132.3 127.8 303.7 Gross claims incurred 8 (67.5) (57.6) (350.0)Reinsurers' share of claimsincurred 8 6.6 18.3 162.3 ------- ------- -------Net claims incurred (60.9) (39.3) (187.7) Policy acquisition costs (24.0) (29.7) (53.2)Operating expenses 9 (24.5) (19.2) (59.9) ------- ------- -------Operating profit 22.9 39.6 2.9 Profit on disposal ofsubsidiary - - 4.0Financing costs 10 (6.9) (11.9) (20.8)Cost of scheme of arrangement (1.5) - - ------- ------- -------Profit / (loss) before incometaxes 14.5 27.7 (13.9) Income taxes 11 (4.8) (8.5) (3.2) ------- ------- -------Profit / (loss) for theperiod 9.7 19.2 (17.1) ------- ------- -------Attributable to:Equity holders of the parent 9.7 19.0 (17.2)Minority interest - 0.2 0.1 ------- ------- ------- 9.7 19.2 (17.1) ------- ------- -------Earnings per share 2 2.5 5.3 (4.8)Basicearnings per share (pence)Diluted earnings per share(pence) 2 2.5 5.3 (4.8) Consolidated unaudited statement of changes in equityfor the six months ended 30 June 2006 Share Share Merger Other Profit Equity Total capital premium reserve reserves and loss component of account account convertible bond £m £m £m £m £m £m £mProfit for the period - - - - 9.7 - 9.7Movement intreasuryshares - - - - (0.4) - (0.4)Groupre-organisation (77.8) (83.6) 69.6 91.8 - - -Rights issue 36.6 67.1 - - - - 103.7 ----- ----- ----- ----- ----- ----- -----Net increase /(decrease) inequity (41.2) (16.5) 69.6 91.8 9.3 - 113.0As at 31December 2005 114.4 83.6 - 63.4 (154.5) 5.5 112.4 ----- ----- ----- ----- ----- ----- -----As at 30 June2006 73.2 67.1 69.6 155.2 (145.2) 5.5 225.4 ----- ----- ----- ----- ----- ----- ----- Consolidated unaudited balance sheetas at 30 June 2006 30 June 30 June 31 December 2006 2005 2005 Note £m £m £mAssetsProperty, plant and equipment 2.1 3.1 1.8Intangible assets 7.8 8.8 8.3Deferred acquisition costs 25.9 42.0 25.3Deferred tax assets 13 36.6 35.7 41.4Financial assets 15 651.6 555.5 579.3Reinsurance contracts 16 505.9 540.8 587.2Insurance and other receivables 214.1 322.7 234.4Cash and cash equivalents 17 201.0 218.4 220.0 -------- -------- --------Total assets 1,645.0 1,727.0 1,697.7 LiabilitiesInsurance contracts 18 (1,291.2) (1,402.0) (1,461.1)Financial liabilities, due after one year - Convertible debt (45.9) (44.4) (45.5) - Loan notes (19.6) (19.5) (19.6)Deferred income (17.5) (11.4) (15.3)Insurance and other payables (45.4) (101.4) (43.8) -------- -------- --------Total liabilities (1,419.6) (1,578.7) (1,585.3) -------- -------- --------Net assets 225.4 148.3 112.4 -------- -------- --------Shareholders' equityShare capital 19 73.2 114.4 114.4Share premium 19 67.1 83.6 83.6Merger reserve 19 69.6 - -Other reserves 19 155.2 63.4 63.4Retained earnings 19 (145.2) (119.9) (154.5)Equity component of convertible debt 19 5.5 5.5 5.5 -------- -------- --------Total shareholders' equity 225.4 147.0 112.4Minority interests - 1.3 - -------- -------- --------Total equity 225.4 148.3 112.4 Net asset value per share (p) 31.1 40.7 31.2Net asset value per share excludingsyndicate capacity (p) 30.0 38.2 28.9 These financial statements were approved by the Board of Directors on 15September 2006 and were signed on its behalf by: P E Selway-Swift O R P CorbettChairman Group Finance Director Consolidated unaudited cash flow statementfor the six months ended 30 June 2006 Six months Six months Year ended ended ended 31 30 June 30 June December 2006 2005 2005 £m £m £m Profit/(loss) before tax 14.5 27.7 (13.9)Cash flow from syndicates 1.5 32.7 32.7Depreciation and amortisation 1.1 1.2 2.6Unrealised gains /(losses) on investments 0.7 (0.3) (0.4)Employee equity incentives 1.5 0.8 1.6Change in receivables less payables (18.0) (17.8) 42.5Movement in exceptional loss provision (6.9) (12.4) (40.0) -------- -------- --------Cash generated from operations (5.6) 31.9 25.1- Interest paid (2.8) (2.6) (5.2)- Interest received 4.5 6.2 12.4- Income taxes paid - (0.7) (1.1) -------- -------- --------Net cash from operating activities (3.9) 34.8 31.2 Cash flows from investing activities- Portfolio investments sales and purchases (111.9) (16.1) (24.1)- Acquisition of property, plant and equipment (0.9) (2.6) (1.5)- Proceeds from disposal of subsidiary, net of disposal of cash and cash equivalents - - 0.5 -------- -------- -------- Net cash used in investing activities (112.8) (18.7) (25.1) Cash flows from financing activities- Receipts from issue of equity 109.8 - -- Expenses relating to issue of equity (6.1) - - -------- -------- -------- Net cash used in financing activities 103.7 - - -------- -------- -------- Movement in cash holdings (13.0) 16.1 6.1 -------- -------- -------- Movement in syndicate funds - Novae share (6.0) 10.9 22.5 Opening cash balance 220.0 191.4 191.4 -------- -------- -------- Closing cash balance 201.0 218.4 220.0 -------- -------- -------- Notes to the interim financial information 1) Significant accounting policies The unaudited interim financial statements, which do not comprise full accounts,have been prepared on the basis of the accounting policies set out in the AnnualReport of SVB Holdings PLC for the year ended 31 December 2005, with theexception of the following: Unearned premium provision During 2006, the Group has moved from computing the provision for unearnedpremiums for each insurance contract using a daily pro rata method. The newmethod involves applying an earning pattern to premiums arising on insurancecontracts which matches premium to the expected pattern of claims emergence. The financial information contained in these interim results does not constitutestatutory accounts of Novae within the meaning of Section 240 of the CompaniesAct 1985. In May 2006, pursuant to a Scheme of Arrangement under s425 of the Companies Act1985, a new parent company was introduced which is now called Novae Group plc.The previous parent company has been renamed Novae Holdings PLC. The introduction of a new holding company constitutes a group reconstruction andhas been accounted for using merger accounting principles. Therefore, althoughthe group reconstruction did not become effective until May 2006, theconsolidated financial statements of Novae Group plc are presented as if bothcompanies had always been part of the same group. Accordingly, the results ofthe Group for the six months ended 30 June 2006 are shown in the consolidatedincome statement and the comparative figures are also prepared on this basis.Earnings per share are unaffected by this scheme. The consolidated financial statements include the results of Novae Group plc andall its subsidiary undertakings made up to the same accounting date. Statutory accounts for SVB Holdings PLC for the year ended 31 December 2005 havebeen delivered to the Registrar of Companies. The auditors have reported on theaccounts, their report was unqualified and did not constitute a statement underSection 237(2) or (3) of the Companies Act 1985. The preparation of financial statements in conformity with IFRS requiresmanagement to make judgements, estimates and assumptions that affect theapplication of policies and reported amounts of assets and liabilities, incomeand expenses. The estimates and associated assumptions are based on historicalexperience and various other factors that are believed to be reasonable underthe circumstances, the results of which form the basis of making the judgementsabout carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates. The Groupmakes use of certain hedging contracts, to which it applies hedge accounting.The accounting policies set have been applied consistently to all periodspresented in this report. The estimates and assumptions are reviewed on an ongoing basis. Revisions toaccounting estimates are recognised in the period in which the estimate isrevised if the revision only affects that period, or in the period of therevision and future periods if the revision affects both current and futureperiods. 2) Earnings per share Basic earnings per share The calculation of earnings per share of 2.5 pence (2005: earnings of 5.3 pence)is based on a profit attributable to equity shareholders of the parent companyof £9.7 million (2005: profit of £19.0 million) and on 393.6 million shares(2005: 361.2 million shares), being the weighted average number of shares inissue excluding shares held by the Employee Benefit Trust and earmarked for theGroup's Long Term Incentive Plan, during the period ended 30 June 2006. Diluted earnings per share Diluted earnings per share are calculated adjusting the weighted average numberof shares outstanding to assume conversion of all potentially dilutive shares.Novae Group has two categories of potentially dilutive ordinary shares:convertible debt and share options. The convertible debt is assumed to have beenconverted into shares and the net profit is adjusted to eliminate the interesteffect less the tax effect. For share options, a calculation is made todetermine the number of shares that could have been acquired at fair value(determined as the average annual market share price) based on the monetaryvalue of the subscription rights attached to outstanding share options. Thenumber of shares calculated as above is compared with the number of shares thatwould have been issued assuming the exercise of the share options. For the six months ended 30 June 2006 and the year ended 31 December 2005, theconvertible debt and share options are not considered to have any dilutiveeffect as the average market price of ordinary shares during these years did notexceed the exercise price. Six months Six months Year ended ended ended 31 30 June 30 June December 2006 2005 2005 £m £m £m Profit / (loss) for theperiod attributable to equityshareholders of parent 9.7 19.0 (17.2)Interest expense on convertible debt (net of tax) - - - -------- -------- -------- Profit used to determinediluted earnings per share 9.7 19.0 (17.2) -------- -------- -------- Weighted average number ofshares in issue (millions)excluding treasury shares 393.6 361.2 361.2Adjustments for:- assumed conversion of convertible debt (millions) - - -- share options (millions) - - - -------- -------- -------- Weighted average number of shares for diluted earnings per share 393.6 361.2 361.2 -------- -------- -------- Diluted earnings per share (pence per share) 2.5 5.3 (4.8) 3) Principal exchange rates (to Sterling) Six months ended Six months ended Year ended 30 June 2006 30 June 2005 31 December 2005 Period Period Period Period Period Period average end average end average end US dollar 1.79 1.85 1.87 1.79 1.82 1.72Euro 1.46 1.45 1.46 1.48 1.46 1.46Canadian dollar 2.04 2.06 2.31 2.20 2.21 2.01 4) Segmental information Segmental information is presented in respect of the Group's business. Theprimary format, business segments, is based on the Group's management andinternal reporting structure. An analysis of the technical profit of the Group is presented below. Thisanalyses the underwriting return split by business segment, separating out theactivities of the ongoing business from the reserve deterioration on thediscontinued units. It is included to increase clarity over the performance ofthe ongoing units, but does not represent a discontinued business analysis forIFRS 5 purposes. Segment results, assets and liabilities include items that can be allocated on areasonable basis. Unallocated items comprise insurance working capital andcentral group items. The Group comprises the following main business segments in addition to theDiscontinued Units: (i) Specialty Business included within the Specialty segment includes financial institutions,professional indemnity, directors and officers, political and credit risks,specie and special situations. (ii) Property The property business consists of four distinct units. The largest of these is aproperty catastrophe reinsurance book with the other three units comprising USfacilities, US open market (now in run-off) and international direct &facultative risks. (iii) Liability A general liability book is written comprising almost entirely UK general andemployers' liability risks supplemented by some Australian binder business.Marine liability business is included in this segment. (iv) Aviation & Marine This segment is dominated by aviation reinsurance with a small specialistaccount of hull and marine war and an energy account. 4a) 100% Syndicate level analysis All items contained within the following analysis are 100% ownership levelsyndicate data. This is to avoid any distortion from the effects of change inownership of syndicates between underwriting years. All stated operating ratiosare calculated by reference to the following information: The segment results for the six months ended 30 June 2006 are as follows: Specialty Property Liability Aviation and Marine Discontinued units Total £m £m £m £m £m £mGrosswritten premium 75.7 32.6 26.1 23.5 (1.6) 156.3Net writtenpremium 53.2 12.9 16.0 11.6 (2.0) 91.7Net premiumrevenue 65.2 23.5 24.5 11.8 (2.0) 123.0Net claimsincurred 34.0 14.8 14.9 3.0 5.9 72.6Operatingexpenses(includingbrokerage) 18.0 8.4 7.5 4.2 0.1 38.2 The segment results for the six months ended 30 June 2005 are as follows: Specialty Property Liability Aviation and Marine Discontinued units Total £m £m £m £m £m £mGrosswritten premium 38.5 46.2 33.7 17.0 (1.5) 133.9Net writtenpremium 0.9 39.5 17.9 10.2 (1.4) 67.1Net premiumrevenue 47.9 42.4 20.4 8.4 (1.4) 117.7Net claimsincurred 29.3 16.2 2.8 (3.2) 11.9 57.0Operatingexpenses(includingbrokerage) 8.9 14.0 13.4 2.5 (0.2) 38.6 The segment results for the year ended 31 December 2005 are as follows: Specialty Property Liability Aviation and Marine Discontinued units Total £m £m £m £m £m £mGrosswritten premium 111.5 71.0 40.7 25.8 (1.3) 247.7Net writtenpremium 68.4 54.6 29.8 18.8 (4.5) 167.1Net premiumrevenue 109.1 95.3 61.0 22.9 (4.5) 283.8Net claimsincurred 75.1 98.3 30.8 1.9 43.5 249.6Operatingexpenses(includingbrokerage) 16.2 25.9 17.4 6.3 2.2 68.0 4b) Segmental Novae ownership level analysis The segment results for the six months ended 30 June 2006 are as follows: Specialty Property Liability Aviation & Discontinued Group Total Marine Units £m £m £m £m £m £m £m Net premium revenue 56.5 23.7 24.5 11.8 (1.7) - 114.8Net claims incurred (30.2) (14.7) (14.8) (3.0) 1.8 - (60.9)Investment return 3.1 2.6 1.5 0.9 (0.1) 4.8 12.8Other income - - - - - 4.7 4.7Acquisition costs (10.5) (5.6) (6.0) (2.0) 0.1 - (24.0)Operating expenses (5.2) (2.6) (1.7) (1.7) (0.1) (13.2) (24.5) ----- ----- ----- ------ ----- ----- ------Operating profit /(loss) 13.7 3.4 3.5 6.0 - (3.7) 22.9Financing costs (6.9)Cost of scheme of arrangement (1.5) ------Profit/(loss) before tax 14.5 The segment results for the six months ended 30 June 2005 are as follows: Specialty Property Liability Aviation & Discontinued Group Total Marine Units £m £m £m £m £m £m £m Net premium revenue 40.9 42.9 20.3 8.4 (1.0) (0.1) 111.4Net claims incurred (25.1) (15.3) (2.8) 3.2 0.7 - (39.3)Investment return 3.5 2.0 0.5 0.6 0.8 6.0 13.4Other income - - - - - 3.0 3.0Acquisition costs (12.0) (9.8) (6.6) (1.5) 0.2 - (29.7)Operating expenses (4.4) (4.0) (4.0) (0.2) (0.1) (6.5) (19.2) ----- ----- ----- ------ ----- ----- ------Operating profit /(loss) 2.9 15.8 7.4 10.5 0.6 2.4 39.6Financing costs (11.9) ------Profit/(loss) before tax 27.7 The segment results for the year ended 31 December 2005 are as follows: Specialty Property Liability Aviation & Discontinued Group Total Marine Units £m £m £m £m £m £m £m Net premium revenue 93.6 96.0 61.1 22.9 (4.0) 1.0 270.6Net claims incurred (63.9) (97.3) (30.9) (1.9) 6.3 - (187.7)Investment return 6.1 4.3 2.8 0.8 (0.2) 12.0 25.8Other income - - - - - 7.3 7.3 Acquisition costs (20.1) (15.4) (14.4) (3.2) (0.1) - (53.2)Operating expenses (9.3) (17.5) (6.9) (3.9) (2.2) (20.1) (59.9) ----- ----- ----- ------ ----- ----- ------Operating profit /(loss) 6.4 (29.9) 11.7 14.7 (0.2) 0.2 2.9Profit on sale of subsidiary 4.0 Financing costs (20.8) -------Profit/(loss) before tax (13.9) 4c) Segmental balance sheet analysis Relevant balance sheet captions are deemed to be attributable to the businesssegments as follows: As at Specialty Property Liability Aviation Total Discontinued Total30 June 2006 & Marine (ongoing) Units £m £m £m £m £m £m £mGross provision for claimsoutstanding 520.4 111.4 137.8 67.1 836.7 279.5 1,116.2Liabilities unallocated by segment 303.4Shareholders' funds 225.4 --------Total liabilities 1,645.0 --------Reinsurers' share of claimsoutstanding 288.3 37.7 13.5 36.3 375.8 77.1 452.9Investment assetsattributable 126.1 44.9 8.0 9.7 188.7 112.7 301.4 ------ ------ ------ ------ ------ ------ -------- 414.4 82.6 21.5 46.0 564.5 189.8 754.3 ------ ------ ------ ------ ------ ------ Assets unallocated by segment 890.7 --------Total assets 1,645.0 -------- As at 31 Specialty Property Liability Aviation Total Discontinued TotalDecember 2005 & Marine (ongoing) Units £m £m £m £m £m £m £mGross provision for claimsoutstanding 580.8 164.9 133.4 73.5 952.6 325.6 1,278.2Liabilities unallocated by segment 307.1Shareholders' funds 112.4 --------Total liabilities 1,697.7 --------Reinsurers' share of claimsoutstanding 338.2 72.0 16.9 41.0 468.1 93.4 561.5Investment assetsattributable 193.3 37.7 6.2 2.0 239.2 100.7 339.9 ------ ------ ------ ------ ------ ------ -------- 531.5 109.7 23.1 43.0 707.3 194.1 901.4 ------ ------ ------ ------ ------ ------ Assets unallocated by segment 796.3 --------Total assets 1,697.7 -------- 5) Premium revenue Six months Six months Year ended ended ended 30 June 30 June 31 December 2006 2005 2005 £m £m £m Gross written premiums 146.6 129.2 244.3Change in the gross provision for unearned premiums 1.0 25.0 122.3 ------- ------- -------Gross premium revenue 147.6 154.2 366.6 ------- ------- -------Outward reinsurance premiums (60.1) (61.8) (74.5)Change in reinsurers' shareof provision for unearned premiums 27.3 19.0 (21.5) ------- ------- -------Premium ceded to reinsurers (32.8) (42.8) (96.0) ------- ------- -------Net premium revenue 114.8 111.4 270.6 ------- ------- ------- 6) Fees and commission income Six months Six months Year ended ended ended 30 June 30 June 31 December 2006 2005 2005 £m £m £m Managing agency fees 0.4 0.6 1.1Commission income 4.3 2.4 6.2 ------- ------- ------- 4.7 3.0 7.3 ------- ------- ------- 7) Investment income Six months Six months Year ended ended ended 30 June 30 June 31 December 2006 2005 2005 £m £m £m Interest income 13.7 14.7 29.1Fair value gains/(losses) (0.5) (1.0) (2.6)Investment management expenses (0.4) (0.3) (0.7) ------- ------- ------- 12.8 13.4 25.8 ------- ------- ------- 8) Net claims incurred Six months Six months Year ended ended ended 30 June 30 June 31 December 2006 2005 2005 £m £m £m Claims paid (180.3) (148.1) (321.8)Change in gross claims provision 105.9 78.1 (68.2)Utilisation of exceptional loss provision 6.9 12.4 40.0 ------- ------- -------Gross claims incurred (67.5) (57.6) (350.0) ------- ------- -------Reinsurers' share of claims paid 90.2 62.2 137.4Change in reinsurers' share of claims provision (83.6) (43.9) 24.9 ------- ------- -------Reinsurers' share of claimsincurred 6.6 18.3 162.3 ------- ------- -------Net claims incurred (60.9) (39.3) (187.7) ------- ------- ------- 9) Operating expenses Six months Six months Year ended ended ended 30 June 30 June 31 December 2006 2005 2005 £m £m £m Underwriting expenses 12.3 14.2 40.8Distribution company expenses 4.2 4.7 9.0Central expenses 8.2 6.3 13.1Foreign exchange gain (0.2) (6.0) (3.0) ------- ------- ------- 24.5 19.2 59.9 ------- ------- ------- 10) Financing costs Six months Six months Year ended ended ended 30 June 30 June 31 December 2006 2005 2005 £m £m £m Cost of convertible bond 2.0 2.3 4.6Loan note interest 1.0 1.0 2.0Letter of credit cost 3.9 8.6 14.2 ------- ------- ------- 6.9 11.9 20.8 ------- ------- ------- 11) Income taxes Recognised in income statement Six months Six months Year ended ended ended 30 June 30 June 31 December 2006 2005 2005 £m £m £mCurrent tax expense:Current period - - 0.3Adjustments for prior years - - - ------- ------- ------- - - 0.3Deferred tax (see note 13)Effect of tax losses utilised 4.8 8.5 2.9 ------- ------- -------Total income tax expense inincome statement 4.8 8.5 3.2 ------- ------- ------- Reconciliation of effective tax rate 30 June 30 June 31 December 2006 2005 2005 Profit / (loss) before tax 14.5 27.7 (13.9)Income tax at the standard UKcorporation tax rate (30%) 4.3 8.3 (4.2)Effect of tax losses not recognised - - 7.4Effect of disallowable expenditure 0.5 0.2 - ------- ------- ------- 4.8 8.5 3.2 ------- ------- ------- The future tax charge for the Group is dependent on its ability to utilise Grouptax losses. 12) Employees a) Employee numbers The average number of persons employed during the period (including directors),analysed by category, was as follows: Six months Six months Year ended ended ended 30 June 30 June 31 December 2006 2005 2005 Underwriting 89 85 86Claims and reinsurance 40 35 36Finance and actuarial 33 25 27Operations 32 32 33Internal audit and compliance 6 5 6 ------- ------- ------- 200 182 188Fusion Insurance Services Limited - 139 114 ------- ------- ------- 200 321 302 ------- ------- ------- The Group's majority shareholding in Fusion Insurance Services Limited("Fusion") was sold on 4 November 2005. With effect from that date all employeesof Fusion ceased to be employed by the Group. b) Employee costs Six months Six months Year ended ended ended 30 June 30 June 31 December 2006 2005 2005 £m £m £m Wages and salaries 6.6 9.4 17.8Performance-related pay Contributions to defined 2.9 2.9 3.8contribution plans 0.9 1.3 2.4Social security costs 1.6 1.5 2.6Employee equity incentives 1.5 0.8 1.6Other costs - 0.1 0.2 ------- ------- ------- 13.5 16.0 28.4 ------- ------- ------- 13) Deferred tax Recognised deferred tax assets The deferred tax asset is attributable to the following: 30 June 31 December 2006 2005 £m £m Temporary differences - (0.8)Unutilised tax losses 36.6 42.2 ------- ------- 36.6 41.4 ------- ------- Unrecognised deferred tax assets Deferred tax assets have not been recognised in respect of the following items: 30 June 31 December 2006 2005 £m £m Trading losses (30% of gross unrecognised losses) 17.9 17.9 Deferred tax assets have not been recognised in respect of these losses due tothe uncertainty that future taxable profit will be available against which theGroup can utilise the benefits therefrom. Future utilisation of the asset hasbeen measured by reference to the Group's projected profit. The Group also has accumulated gross capital losses of £41.6 million. No assethas been recognised in respect of these losses. 14) Principal subsidiary undertakings Country of Class of Principal Percentage incorporation share held activity of ordinary shares heldNovae HoldingsPLC England & Ordinary Intermediate 100% Wales holding companyNovaeSyndicatesLimited England & Ordinary Lloyd's 100% Wales managing agencyNovaeCorporateUnderwritingLimited England & Ordinary Lloyd's 100% Wales corporate memberNovae Capital1 Limited England & Ordinary Investment 100% Wales companyCreditIndemnity &FinancialServicesLimited England & Ordinary Investment 100% Wales companyNovaeManagementLimited England & Ordinary Infrastructure 100% Wales company*NovaeInsuranceCompanyLimited England & Ordinary Insurance 100% Wales company*NovaeUnderwritingLimited England & Ordinary Service company 100% WalesNovae Capital2 Limited England & Ordinary Not trading 100% WalesNovae AESOPTrusteeCompanyLimited England & Ordinary Not trading 100% WalesSyndicateCapitalUnderwritingLimited England & Ordinary Not trading 100% Wales * These companies were inactive to 30 June 2006; they commenced trading on 1July 2006. The results, assets and liabilities of all of the above subsidiaries areincluded in the consolidated financial statements. 15) Financial assets 30 June 31 December 2006 2005 £m £mFair value through profit or loss:Fixed interest securities 650.8 578.5Equities 0.8 0.8 651.6 579.3 Syndicate 301.4 339.9Corporate 350.2 239.4 651.6 579.3 Listed 651.6 579.3Unlisted - - 651.6 579.3 Breakdown of fixed interest securities by credit rating: 30 June 31 December 2006 2005 % % Government/AAA 94.4 94.0AA+/AA/AA- 3.2 3.0A+/A/A- 2.4 3.0 ------ ------ 100.0 100.0 ------ ------Breakdown of investments by currency: 30 June 31 December 2006 2005 % % US Dollar 51.9 46.4Sterling 41.4 47.1Other currencies 6.7 6.8 ------ ------ 100.0 100.0 ------ ------ 16) Reinsurance contracts 30 June 31 December 2006 2005 £m £mReinsurance contracts 505.9 587.2Less:Reinsurers' share of: - provisions for unearned premium (53.0) (25.7) ------ ------ - claims reserves including IBNR 452.9 561.5 - IBNR (98.6) (108.0) ------ ------Balance 354.3 453.5 Being:Recoveries on claims notified not yet due 364.4 465.2Provision for bad debt (notified not yet due) (10.1) (11.7) ------ ------Net recoveries on claims notified not yet due) 354.3 453.5 The reinsurers' share of paid and notified losses can be analysed by creditrating as follows*: 30 June 31 December 2006 2005 % % S&P: AAA 13.7 13.1AMB: A++S&P: AA 22.9 32.7AMB: A/A-S&P: A (inc Lloyd's) 57.0 44.6AMB: B++/B+Other 6.4 9.6 ------ ------ 100.0 100.0 ------ ------ * Due to the way the Group monitors its reinsurance balances different ratingagencies are used depending upon the domicile of the reinsurer. Standard andPoors (S&P) and AM Best (AMB) ratings have been grouped together in a way thatthe Group has deemed most appropriate. 17) Cash and cash equivalents 30 June 31 December 2006 2005 £m £m Cash 125.1 139.2Overseas deposits 75.9 80.8 ------ ------ 201.0 220.0 ------ ------ Of the total cash and cash equivalents £182.4 million (December 2005: £188.5million) is held by the syndicates to meet policyholder liabilities. 18) Insurance contracts a) Insurance contract liabilities 30 31 June December 2006 2005 £m £m £m £m £m £m Gross Reinsurance Net Gross Reinsurance Net Unearned 154.8 53.0 101.8 155.8 25.7 130.1premiumsIBNR 340.3 98.6 241.7 357.9 105.0 252.9Notified 775.9 354.3 421.6 920.3 456.5 463.8claimsExceptionalloss 20.2 - 20.2 27.1 - 27.1provisionTotal ------- ------- ------ ------- ------- ------insurance liabilities 1,291.2 505.9 785.3 1,461.1 587.2 873.9 ------- ------- ------ ------- ------- ------ In addition to reserves established at syndicate level on the basis of actuarialbest estimate, an additional £27.1 million of provision was held at Group levelas 31 December 2005 in respect of the uncertainty surrounding potential futureclaims development from discontinued units. This provision, which is over andabove syndicate reserves set at actuarial best estimate, was established as at30 June 2004 to meet possible future adverse claims development. During the sixmonths ended 30 June 2006 £6.9 million of this provision was utilised, leaving£20.2 million remaining. The provision was established to strengthen reserves associated with thediscontinued business, in particular the liability reinsurance business, whichare subject to a high degree of uncertainty. This reflects market conditions inthe late 1990s and the claims environment in the US in the period covered by thecontracts written being significantly different from that in prior periods,which makes any projection methodology that relies upon extrapolation of pasttrends subject to an increased degree of subjectivity. As a result of these matters, there exists significant uncertainty concerningthe amounts provided and subsequent information and events may result insignificant adjustments to the amounts provided. b) Movement table for insurance contract liabilities i) Unearned premium Six months Year ended ended 30 June 31 December 2006 2005 £m £mBalance as at 1 January 155.8 279.0Premiums written during the period 146.6 243.4Less: premiums earned during the period (147.6) (366.6) ------- -------Balance at period end 154.8 155.8 ------- ------- ii) Claims reserve Six months Year ended ended 30 June 31 December 2006 2005 £m £mBalance as at 1 January 1,278.2 1,125.5Movement in claims outstanding (144.4) 200.1Movement in IBNR (17.6) (47.4) ------- -------Balance at period end 1,116.2 1,278.2 ------- ------- iii) Exceptional loss provision Six months Year ended ended 30 June 31 December 2006 2005 £m £mBalance as at 1 January 27.1 67.1Movement during period (6.9) (40.0) ------- -------Balance at period end 20.2 27.1 ------- ------- c) Claims development Claims development has been shown on an underwriting year basis. Underwriting year 2001 and 2002 2003 2004 2005 2006 Total priorGross claims: Estimate of ultimategross claims - at end of underwriting year 2,060.3 288.1 229.0 273.1 295.9 - one year later 2,183.5 235.5 209.2 237.9 - two years later 2,424.6 233.3 184.3 - three years later 2,615.2 266.4 - four years later 2,760.3 - position at 30 June 2006 2,763.0 272.3 176.4 239.4 253.0 141.9 -------- ----- ----- ----- ----- ----- ------Gross claims paid - at end of underwriting year 881.7 4.5 4.1 10.9 23.3 - one year later 1,170.2 28.3 35.5 60.8 - two years later 1,466.1 68.9 62.6 - three years later 1,709.9 118.1 - four years later 1,920.5 - position at 30 June 2006 2,023.8 131.0 75.2 97.3 59.0 0.3 -------- ----- ----- ----- ----- ----- -------Gross ultimateclaims reserve 739.2 141.3 101.2 142.1 194.0 141.6 1,459.4Gross unearnedclaims reserve (173.9)Third partyparticipation onsyndicates (169.3) -------Gross claims reserve 1,116.2 ------- Underwriting year 2001 and 2002 2003 2004 2005 2006 Total priorNet claims:Estimate ofultimate net claims - at end of underwriting year 1,210.5 187.6 167.0 214.1 206.0 - one year later 1,281.0 160.8 147.2 182.4 - two years later 1,322.8 143.6 125.3 - three years later 1,482.2 160.4 - four years later 1,533.3 - position at 30 June 2006 1,542.7 165.5 123.9 178.7 171.4 107.6 -------- ----- ----- ----- ----- ----- -------Net claims paid - at end of underwriting year 588.7 4.3 4.1 10.8 9.6 - one year later 758.1 22.6 21.8 48.6 - two years later 888.8 49.2 41.6 - three years later 1,029.0 76.8 - four years later 1,138.0 - position at 30 June 2006 1,184.5 87.1 52.0 66.7 27.1 0.3 -------- ----- ----- ----- ----- ----- -------Net ultimateclaims reserve 358.2 78.4 71.9 112.0 144.3 107.3 872.1Net unearnedclaims reserve (129.8)Third partyparticipation onsyndicates (79.0) -------Net claims reserve 663.3 ------- The tables above show the development of claims over time on a gross and net ofreinsurance basis. These claims are shown on an ultimate basis for eachsuccessive underwriting year and are stated at the 100% syndicate level.Balances have been translated at exchange rates prevailing at 30 June 2006 inall cases. 19) Capital and reserves Reconciliation of movement in capital and reserves Share Share Merger Other Profit Equity Total capital premium reserve reserves and loss component of account account convertible bond £m £m £m £m £m £m £mAs at 31December 2005 114.4 83.6 - 63.4 (154.5) 5.5 112.4 Profit for theperiod - - - - 9.7 - 9.7Movement intreasury shares - - - - (0.4) - (0.4)Groupre-organisation (77.8) (83.6) 69.6 91.8 - - -Rights issue 36.6 67.1 - - - - 103.7As at 30 June2006 73.2 67.1 69.6 155.2 (145.2) 5.5 225.4 Share capital and share premium Ordinary shares of 10p Preference shares of Deferred shares of 40p £1 Number £ Number £ Number £Authorised31 December2005 - NovaeHoldings PLC(formerly SVBHoldings PLC) 572,023,200 57,202,320 - - 194,494,200 77,797,68030 June 2006 -Novae Groupplc 349,950,000 349,950,000 50,000 50,000 - - Issued and fullypaid31 December2005 366,106,728 36,610,673 - - 194,494,200 77,797,680Disposals - (194,494,200) (77,797,680) ----------- ------------ ---------- --------- ----------- ----------18 May 2006-NovaeHoldings PLC 366,106,728 36,610,673 - - - - ----------- ------------ ---------- --------- ----------- ----------On formationof Novae Groupplc 2 2 - - - -Onredesignation 18 - 50,000 50,000 - -Groupreconstruction- shares inNovae HoldingsPLC exchangedfor shares inNovae Groupplc 366,106,708 36,610,673 - - - 77,797,680Rights issue 366,106,728 36,610,67330 June 2006 732,213,456 73,221,348 50,000 50,000 - - ----------- ------------ ---------- --------- ----------- ---------- The authorised and issued deferred shares in Novae Holdings PLC (formerly SVBHoldings PLC) ("the deferred shares") were created in the context of the capitalreorganisation approved by shareholders on 27 May 2003 and were designed toenable the re-designation of each of Novae Holdings PLC's ordinary 50 penceshares, as they then were, into one 10 pence ordinary share and one 40 pencedeferred share. The deferred shares carried no voting, dividend or other rightsand had no commercial value. The authorised and issued ordinary 10 pence shareswere similarly created in the capital reorganisation approved by shareholders on27 May 2003. The deferred shares were cancelled on the effective date of thescheme described below. On 18 May 2006 under a scheme of arrangement between Novae Holdings PLC(formerly SVB Holdings PLC), the former holding company of the Group, and itsshareholders under Section 425 of the Companies Act 1985, and as sanctioned bythe High Court, all the issued shares in that company were cancelled and thesame number of new shares were issued to Novae Group plc in consideration of theallotment to shareholders of one ordinary share in Novae Group plc for eachordinary share in Novae Holdings PLC held on the record date, 17 May 2006. Inthe above table the figures up to 18 May 2006 relate to shares in Novae HoldingsPLC. Subsequent movements relate to shares in Novae Group plc. Novae Group plc was incorporated on 12 January 2006, under the name SVB NewcoPLC, with an authorised share capital of £50,000 and 2 issued ordinary shares of£1 each. The ordinary shares carry full voting and dividend rights. On 15 May 2006: (i) the authorised capital was increased from £50,000 to£350,000,000 by the creation of an additional 349,950,000 ordinary shares of £1each; (ii) £50,000 of unissued ordinary shares of £1 each wereredesignated as non-voting redeemable preference shares of £1 each, which werethen issued; (iii) the remaining ordinary shares of £1 each were sub-divided into10 ordinary shares, having in each case the rights set out in the Articles ofAssociation. Thus, at 18 May 2006, the balance sheet of Novae Group plc was as follows: £AssetsCash and cash equivalents 50,002 --------Equity and liabilitiesIssued capitalOrdinary shares of 10 pence each 2Non-voting redeemable preference shares of £1 each 50,000 --------Total equity 50,002 -------- On 18 May 2006 as part of the scheme of arrangement noted above, a further366,106,728 ordinary shares of 10 pence were issued, whereby Novae Group plc wasinterposed as the new holding company of the Novae Group. As required by Section131 of the Companies Act 1985 (Merger Relief), no share premium was recognised.The valuation of these shares totalled £106.2 million; the balance over thenominal value is £69.6 million which is classed as a merger reserve. Costs ofthe scheme of arrangement of £1.5 million are included in the income statement. Novae Group plc then undertook a one-for-one rights issue, whereby a further366,106,728 ordinary shares of 10 pence were issued, at a premium of £67.1million. Prior to the Group reconstruction, Novae Group plc was an inactive company, andthe acquisition therefore added no additional profit or loss to the Novae Group. Independent review report to Novae Group plc We have been instructed by the company to review the financial information forthe six months ended 30 June 2006 which comprises the Consolidated IncomeStatement, the Consolidated Balance Sheet, the Consolidated Statement of Changesin Equity, the Consolidated Cash Flow Statement and Notes 1-19. We have read theother information contained in the interim report and considered whether itcontains any apparent misstatements or material inconsistencies with thefinancial information. This report is made solely to the company in accordance with the terms of ourengagement to assist the company in meeting the requirements of the ListingRules of the Financial Services Authority. Our review has been undertaken sothat we might state to the company those matters we are required to state to itin this report and for no other purpose. To the fullest extent permitted by law,we do not accept or assume responsibility to anyone other than the company forour review work, for this report, or for the conclusions we have reached. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the directors. The directorsare responsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority which require that the accountingpolicies and presentation applied to the interim figures should be consistentwith those applied in preparing the preceding annual accounts except where anychanges, and the reasons for them, are disclosed. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4issued by the Auditing Practices Board for use in the UK. A review consistsprincipally of making enquiries of management and applying analytical proceduresto the financial information and underlying financial data and, based thereon,assessing whether the accounting policies and presentation have beenconsistently applied unless otherwise disclosed. A review excludes auditprocedures such as tests of controls and verification of assets, liabilities andtransactions. It is substantially less in scope than an audit performed inaccordance with International Statements on Auditing (UK and Ireland) andtherefore provides a lower level of assurance than an audit. Accordingly, we donot express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 June 2006. Emphasis of matter In forming our review conclusion, which is not qualified, we have considered theadequacy of the disclosures made in note 18 to the interim report concerning theuncertainties involved in determining the level of gross loss reserves inrelation to the classes of business referred to by management as discontinuedunits. As explained in note 18, the Group's ultimate liability will vary as aresult of subsequent information and events that may result in materialadjustments to the amounts provided. KPMG Audit PlcChartered Accountants8 Salisbury SquareLondonEC4Y 8BB 15 September 2006 Company information DirectorsP E Selway-Swift (Chairman)M K FoshJ R AdamsO R P CorbettP C MatsonA M NicholsSir Bryan CarsbergC A C ChaplinA E G HambroL Santambrogio SecretaryM J Turvey MA (Cantab), Solicitor Registered office71 Fenchurch StreetLondon EC3M 4HHEmail: [email protected]: www.novae.comRegistered number 5673306 StockbrokersHoare Govett Limited250 BishopsgateLondon EC2M 4AA RegistrarsComputershare Investor Services PLCPO Box 82The PavilionsBridgwater RoadBristol BS99 7NH BankersBarclays Bank Plc54 Lombard StreetLondon EC3V 9EX Lloyds TSBPO Box 72Bailey DriveGillingham Business ParkKent ME8 0LS AuditorKPMG Audit Plc8 Salisbury SquareLondon EC4Y 8BB Financial calendarAnnouncement of preliminary results to 31 December 2006 March 2007 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Novae Group