Advent Capital Holdings PLC – Interim Results 06.08.07

ADVENT – Interim Results
Key highlights

• Profit before tax of £6.7m (H1 2006: £10.4m which included a foreign exchange profit of £4.4m compared with a foreign exchange profit of £0.3m for H1 2007).
• First half non USA catastrophe losses of £4.9m against an earned non USA catastrophe margin of £0.9m.
• Gross premiums written of £96.1m (H1 2006: £90.4m). 
• Market conditions are increasingly competitive but remain attractive and within expectations.
• Net notified loss ratio, excluding IBNR, for 2007 year of account of 11% at 30 June 2007 (H1 2006: 5%).
• Net loss estimates in underlying currencies for the 2005 hurricanes unchanged in the second quarter.
• Improvement of £0.1m in prior years' claims for the first half of 2007.
• First half figures reflect the changes in business mix planned for 2007 and the resulting later recognition of premium income as expected.
• Continued strategy of reducing peak exposures to major catastrophes.
• With approximately 75% of premiums written in US dollars, the weak US dollar will continue to negatively impact premiums and earnings for 2007.
• One time tax charge of £1.4m on the reported reduction in the UK corporate tax rate to 28% previously reported in the first quarter.

Financial summary
In the first quarter of 2007, the Company adopted IFRS for the first time with application effective as at 1 January 2006.  Comparatives have been restated to an IFRS basis.

Six months (unaudited)

Six months (unaudited)

*expense ratio of 24% and combined ratio of 90% excluding the foreign exchange gain of £5.0m

Financial Review
For the six months ended 30 June 2007, the Company's profit before tax was £6.7m, compared with a profit before tax of £10.4m for the six months ended 30 June 2006 which included a foreign exchange profit of £4.4m.  Results for the first six months of 2007 have been affected by:

Change in premium writing and earning profile following Syndicate 780's 2007 business plan to reduce the volatility of its portfolio with a reduction in various lines of the Assumed account historically written predominantly in the first quarter of the year.  The increase in the 2007 plan premium is in the Property Insurance account, written over the year, and the Energy account, predominantly written in the second and third quarters of the year.  Reinsurance expense for the first half of 2007 reflects the decision to bring forward the purchase of reinsurance to 1 January 2007 and the run-off of certain Original Loss Warranty (OLW) policies purchased in mid 2006.  Weakening US dollar to an average rate of US$1.97/£ for the first half of 2007 from an average rate of US$1.79/£ for the first half of 2006, a 10.1% decrease, has adversely affected gross and net premiums, of which approximately 75% are written in US dollars, and underwriting profit.

For the six months ended 30 June 2007, the profit after tax was £3.5m which includes a one time tax expense of £1.4m for the reduction in the deferred tax asset resulting from the change in the UK corporate tax rate from 30% to 28% which was substantially enacted on 26 June 2007.  Earnings per share amounted to 0.9p for the first six months of 2007 compared with 2.0p for 2006.

For the six months ended 30 June 2007, the Company had an underwriting profit of £4.4m and a combined ratio of 90% compared with an underwriting profit of £8.8m and a combined ratio of 77.5% for the first half of 2006 (underwriting profit of £3.8m and a combined ratio of 90% excluding the foreign exchange profit of £5.0m).

At 30 June 2007, the 2007 underwriting year results reflect the changes in Syndicate 780's business mix and, as expected, a slower premium earnings pattern compared to the first half of 2006.  Claims in the first half of 2007 include European and Australian catastrophe losses of £4.9m, comprising UK floods (£2.3m), Australian storms (£0.8m) and European Windstorm Kyrill (£1.8m), in excess of the earned catastrophe margin on non USA exposed business of £0.9m, for a net charge of £4.0m.  The 2006 underwriting year had an underwriting profit of £3.4m and a combined ratio of 77.5%.  Net unearned premium amounted to £4.3m at 30 June 2007 and will be substantially earned by the end of 2007.  The 2005 and prior underwriting years had an underwriting profit of £0.7m for the first half of 2007, a significant improvement from the underwriting loss of £2.7m for the first quarter of 2007 with favourable claims development in the second quarter offsetting additional Energy claims of £2.2m arising from Hurricane Rita in the first quarter.  Advent Re had no underwriting profit or loss on premiums earned of £0.6m (US$1.2m) as it books conservative loss ratios on its catastrophe exposed business.  Consistent with the Company's premium recognition policy, Advent Re recognises premiums as earned based on the underlying catastrophe exposures with the result that much of its premium will be earned in the second half of 2007 during the US hurricane season.

For the six months ended 30 June 2007, the pre tax profit of £6.7m includes a net improvement in prior years' claims, net of reinstatement premiums, of £0.1m compared with adverse development of £1.9m reported in the first quarter of 2007 and adverse development of £3.0m for the six months ended 30 June 2006.

Underwriting Review

Changes to the gross and net premiums written and earned for the six months ended 30 June 2007 compared with the first half of 2006 are due to the following factors:

The reduction in gross premium income on the current year of account following the change in Syndicate 780's business mix and as expected, its premium writing and earning profile.  The effect of the portfolio transfer premium (RITC) of £6.8m (H1 2006: £0.7m) received from external Names on the closure at 31 December 2006 of Syndicate 780's 2004 year of account as a result of the increase in the Company's capacity on Syndicate 780's 2005 year of account to 53.8% from 47.7% for the 2004 year of account.  The reduction in reinstatement premiums to £1.7m for the first half of 2007 (H1 2006: £7.9m). The weaker US dollar.

The impact of these movements are summarised below:

For the six months ended 30 June 2007, gross premiums written increased to £96.1m from £90.4m in 2006.  Excluding the impact of RITC and reinstatement premiums, gross premiums written increased by 7.0% to £87.6m in the first half of 2007 from £81.8m in the first half of 2006 reflecting the growth in premium income from Advent Re and Syndicate 780 and Advent's increased share of Syndicate 780's capacity for the 2007 year of account.  Excluding the impact of the weaker US dollar, gross premiums written increased by 15.9% over the first half of 2006.  Syndicate 780's 2007 business plan included an increase in Marine account premiums of £15.9m predominantly written in the second and third quarters of 2007 and in Property Insurance account premiums of £14.7m written throughout 2007.  Advent Re wrote gross premiums of £6.3m (US$12.4m) during the first half of 2007.

For the six months ended 30 June 2007, net premiums written increased to £76.7m from £66.2m in 2006 principally due to prior years' negative premiums written of £2.4m recorded in the first six months of 2006 resulting from a reduction in ultimate premium estimates.  Excluding the impact of RITC and reinstatement premiums and the weaker US dollar, net premiums written increased by 30.2% for the first six months of 2007 compared with the first six months of 2006.

For the six months ended 30 June 2007, net earned premiums increased to £42.6m from £40.0m in 2006 which reflects:

• Increase in net earned premiums on prior underwriting years, excluding RITC and reinstatement premiums, to £16.9m in the first half of 2007 from £8.3m in 2006, partially offset by;
• Decrease in net earned premiums on the 2007 underwriting year to £18.9m for the first half of 2007 from £23.2m on the 2006 underwriting year for the first half of 2006, principally due to the change in Syndicate 780's premium mix referred to above; and
• The weaker US dollar.

Insurance Segment Review  30 June 2007

Non Marine Reinsurance - Syndicate 780
The premium written for Non Marine Reinsurance for the 2007 underwriting year is currently 13% ahead of plan (at Lloyd's business plan exchange rate of US$1.77/£), with underwriting conditions in line with expectations.  Changes to the structure of the Florida Hurricane Catastrophe Fund have had a minimal impact on premiums written.  Although pricing is under pressure, rates for USA catastrophe exposed business remain robust, with pricing for mid year 2007 renewals in line with January 2007 renewals but down from the higher rates achieved for mid year 2006 renewals.  Reductions in non USA treaty rates and competition for premium signings continue to affect our ability to further develop this account.  The Assumed account has focused on non USA catastrophe exposed business and is developing in line with our expectations, albeit market conditions are becoming more competitive. Rates on non catastrophe exposed business continue to be under greater pressure worldwide and opportunities for growth are limited.

Catastrophe activity in the USA for the first six months of 2007 has been relatively modest with Property Claims Services listing 13 reportable events with aggregate insured losses of US$3.4bn compared with 20 events and with aggregate insured losses of US$6.5bn in the first six months of 2006. 

Outside the USA, we have incurred attritional catastrophe losses of £4.1m comprising European windstorm Kyrill (£1.7m), June UK floods (£1.9m), and Australian storms (£0.5m).  Reliable claims information on the UK floods is still scant with the Company's loss estimate based on a market insured loss of £1.5bn.  We expect the majority of these insured claims to be retained within the deductibles of the primary insurance companies.

For the six months ended 30 June 2007, the Non-Marine Reinsurance account had an underwriting profit of £0.3m and a combined ratio of 99.4% which was negatively impacted by the attritional catastrophe losses referred to above, (net of earned catastrophe margin on non USA business of £0.9m) of £3.2m.  The underwriting profit of £5.7m in 2006 principally resulted from the foreign exchange profit of £3.5m and the absence of attritional catastrophe losses.

Advent Re
For the six months ended 30 June 2007, Advent Re wrote US$12.4m (£6.3m) of gross premiums, up from US$2.8m (£1.4m) in the first quarter of 2007.  Advent Re's premiums written net of brokerage, of US$11.5m, are principally from existing clients and relationships and are slightly less than its plan of US$12 to US$13m, with US$7.8m relating to policies which expire on 31 December 2007 and US$3.7m relating to policies which expire on 31 March 2008.

Advent Re has written all of its aggregate limits of US$30m for USA earthquake and wind losses, US$20m for European losses and US$15m for Japanese losses.  The risks written consist of Original Loss Warranty (OLW) policies for 27% of premiums written and traditional Ultimate Net Loss (UNL) policies for 73% of premiums written.  The attachment points for the OLW's are in line with plan of US$20bn for USA Wind, US$15bn for USA and Japanese quake and US$10bn for European losses.  The attachment points for UNL policies are at a similar market loss and modelled return periods as for the OLW policies, recognising that the return periods are derived from modelled data such that the attachment points are estimates in terms of the probability and size of the market loss.

There have been no catastrophe events affecting Advent Re's policies during the period.  No underwriting profit has been earned from these contracts as we maintain conservative loss ratios reflecting its exposure to catastrophe risk and the US hurricane season in particular.

Property Insurance
The Property Insurance account has been targeted for growth in 2007 with gross premiums written up by 25% over the first half of 2006.  Currently, premiums written for the 2007 underwriting year stand at 88% of plan (at business plan exchange rates).  While pricing for non catastrophe exposed property business is under significant pressure worldwide, we have noted a levelling off of price reductions in the UK.

For the six months ended 30 June 2007, the Property Insurance account had an underwriting profit of £2.7m and a combined ratio of 77.2% which included a release of IBNR on the 2006 year of account of £1.6m and net losses of £0.8m from the European Windstorm Kyrill, June UK floods and Australian storms.  For the six months ended 30 June 2006, the Property Insurance account had an underwriting profit of £1.4m and a combined ratio of 80.5% which included a foreign exchange profit of £0.7m. 
Marine
For the six months ended 30 June 2007, the Marine account had an underwriting loss of £0.1m down from the underwriting loss of £1.4m for the first quarter of 2007 and compared with an underwriting profit of £0.9m in 2006 which included a foreign exchange profit of £0.7m. The 2007 underwriting loss was impacted by a deterioration of £2.2m on Hurricane Rita energy claims in the first quarter of 2007.  For the 2006 year of account, the Marine segment is performing well with an underwriting profit of £1.8m for the first half of 2007. 

Premiums written for the Marine segment for the 2007 underwriting year are at 65% of plan (at business plan exchange rates) with only modest amounts of premium having been written for the new classes of business such as cargo and war, and with the Marine Excess of Loss account experiencing excess capacity in the market and general rate softening. The Energy account, representing 78% of plan premium for the Marine segment, is expected to reach 90% of business plan targets.  Rates are holding up well but increased competition for business is creating pressure on premium signings and clients are retaining more of the original risk.  The cargo account has not developed as we had expected with existing markets competing hard for premium on both open market and facility business.  We will reassess this account as part of the 2008 business plan.

Other
For the six months ended 30 June 2007, the Other account had an underwriting profit of £1.5m up from £0.9m in 2006.  For the first half of 2007, Syndicate 2 had an underwriting profit of £1.1m arising from favourable development principally on 2001 and prior years' aviation and energy claims compared with an underwriting profit of £0.4m in the first half of 2006. The remaining business performed in line with plan.

Syndicate 780 - Net notified loss ratio at 6 months (excluding IBNR)

The RDS at 1 July 2007 are in line with 2007 business plan guidelines except for Japanese quake, where the Syndicate increased its writing of Japanese business as part of its diversification away from US catastrophe events.

Expenses
For the six months ended 30 June 2007, the underwriting expense ratio (excluding acquisition costs and the impact of exchange gains) was 8.5%, compared with 8.9% for the first six months of 2006.

Investment Return
For the six months ended 30 June 2007, the investment return increased to £6.1m (H1 2006: £5.7m), reflecting an improved interest rate environment in the US and UK.  Throughout the period, the US dollar portfolio duration was maintained short, between 0.69 and 0.86 years. The US dollar portfolio is now wholly invested in government or government guaranteed securities, with an overall return on US bonds of 2.4% (annualised return of 4.8%).  Neither the syndicates nor the Company invest in asset backed or mortgage securities, equities or derivatives.

Sterling funds were held mainly in AA rated bank corporates (including Funds at Lloyd's which are invested by Lloyd's in a pooled money market fund) achieving a return of 2.6% (annualised return of 5.2%).  Subsequent to 30 June 2007, £22.4m of Advent Re's cash funds (included in corporate cash and cash equivalents below) were invested in short term US treasury bills held in trust accounts as collateral for cedants' policy limits.

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