Advent Quarter 3 Results - 30.10.07

Advent, the specialist Lloyd's insurer, yesterday reported its results for the nine months ended 30 September 2007.

Key highlights

         Profit before tax of £12.9 million (2006: £12.6 million).
         Profit before tax and foreign exchange profit up 50% to £12.3 million from £8.2 million in 2006.
         Foreign exchange profit of £0.6 million (2006: £4.4 million), reflecting the Company's matched foreign currency position since August 2006.
         Gross premiums written of £115.6 million (2006: £105.9 million). 
         Net notified loss ratio, excluding IBNR, for Syndicate 780's 2007 year of account of 24% at 30 September 2007 (2006: 12%).
         Improvement in prior years' reserves of £2.3 million for the first nine months of 2007.
         Net loss estimates for the 2005 hurricanes remain stable.
         Non USA catastrophe losses, net of reinsurance recoveries and reinstatement premiums, of £8.9 million for 2007.
         With approximately 75% of premiums written in US dollars, the weak US dollar continues to negatively impact premiums and earnings in 2007.
         One time tax charge of £1.4 million from the future reduction in the UK corporation tax rate from 30% to 28% recorded in the second quarter of 2007.

Non Marine Reinsurance

Syndicate 780
As major loss events have continued at a low level in 2007, pricing pressure has increased for the US Account.  Pricing levels remain attractive, albeit below the high points reached in late 2006, with the market reluctant to over commit capacity to areas with significant catastrophe exposure.  More importantly, terms, conditions and deductibles are holding, which help to protect margins against attritional claims.

The non USA account has experienced a series of losses arising from the 2007 Catastrophes, the effect of which has been to increase renewal prices for accounts which experienced claims; otherwise, small price reductions continue with terms and conditions holding.

For the nine months ended 30 September 2007, the Non Marine Reinsurance account had an underwriting profit of £3.9 million and a combined ratio of 90.0% which was negatively impacted by 2007 Catastrophes net losses, of £7.2 million. The underwriting profit of £7.0 million in 2006 principally resulted from a foreign exchange profit of £3.2 million and the absence of attritional catastrophe losses.

Advent Re
For the nine months ended 30 September 2007, Advent Re wrote US$11.5 million of premiums, net of brokerage, with US$7.8 million relating to policies which expire on 31 December 2007 and US$3.7 million relating to policies which expire on 31 March 2008.

Advent Re has written aggregate limits of US$30 million for USA earthquake and wind losses, US$20 million for European losses and US$15 million 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$20 billion for USA Wind, US$15 billion for USA and Japanese quake and US$10 billion 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.

No underwriting profit has been earned from these contracts as we maintain conservative loss ratios reflecting Advent Re's exposure to catastrophe risk and the US hurricane season in particular.

Property Insurance
Prior to recent flood losses, the UK account had been experiencing steady price reductions.  There are now signs that this trend is reversing but it is still too early to determine how far it will go.  Pricing outside the UK continues to soften with the larger accounts coming under the most pressure.

For the nine months ended 30 September 2007, the Property Insurance account had an underwriting profit of £2.1 million and a combined ratio of 88.1% which was negatively impacted by 2007 Catastrophes net losses, of £1.7 million.  For the nine months ended 30 September 2006, the Property Insurance account had an underwriting profit of £1.2 million, which included a foreign exchange profit of £0.9 million, and a combined ratio of 89.5%.

Marine
For Gulf of Mexico energy exposures, pricing remains unchanged with capacity in short supply. Sub limits and aggregate catastrophe exposure caps remain in force and margins are attractive. Elsewhere, pricing is softening with further reductions of up to 10% experienced in the third quarter. Pricing for marine exposures is turning down as the impact of losses in the early part of 2007 fade however terms and conditions remain firm at present.

For the nine months ended 30 September 2007, the Marine account had an underwriting profit of £0.9 million and a combined ratio of 90.7%, unchanged from 2006 (which included a foreign exchange profit of £0.7 million) and a combined ratio of 87.0%. The 2007 underwriting result was impacted by a deterioration of £2.2 million on Hurricane Rita energy claims in the first quarter of 2007.  

Other
For the nine months ended 30 September 2007, the Other account had an underwriting profit of £2.3 million a significant improvement from the underwriting loss of £0.5 million in 2006.  Syndicate 2 had an underwriting profit of £1.5 million principally arising from a favourable development on 2001 and prior years' aviation and energy claims compared with an underwriting loss of £1.0 million in 2006.

Syndicate 780 - Net notified loss ratio at 9 months (excluding IBNR)

The net notified loss ratio of 23.6% includes notified losses from the 2007 Catastrophes of 12.6%.

Catastrophe Exposure

 At 30 September 2007, Syndicate 780's exposure to any one of the major Lloyd's Realistic Disaster Scenarios (RDS) is summarised below compared with the 2007 business plan:

The RDS at 30 September 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.  For Syndicate 780's 2008 business plan, the RDS reflect the Company's continuing strategy of managing its significant catastrophe exposures within Lloyd's guidelines.

Expenses
For the nine months ended 30 September 2007, the operating expense ratio (excluding acquisition costs and foreign exchange gains) was 8.4%, compared with 8.6% in of 2006, reflecting the higher earned premium in 2007.

Investment Return
For the nine months ended 30 September 2007, the investment return increased to £9.7 million (2006: £9.5 million), reflecting an increase in the Company's cash and investments and a stable interest rate environment in the United States.

The Syndicate's US dollar investment portfolio duration has been maintained short, between 0.49 and 0.86 years. It is now wholly invested in government or government guaranteed securities, with an overall return on US bonds of 4.2% (annualised return of 5.6%).  Neither the syndicates nor the Company invest in asset backed or mortgage securities (ABS and MBS), equities or derivatives.  Certain overseas deposits managed by Lloyd's (over which the Company has no investment control) have invested in corporate bonds, MBS and ABS as referred to in note 5 to the financial statements.

The corporate Funds at Lloyd's of £94 million were reinvested in short term government and government guaranteed securities during August 2007, to further reduce the Company's exposure to bank credit risk in current credit market conditions.

Advent Re's funds (included in corporate cash and cash equivalents below) continued to be invested in short term US treasury bills held in trust accounts as collateral for cedants' policy limits.  The return achieved for the nine months ended 30 September 2007 was £1.6 million an for annualised return of 4.6%.

The Company continues to maintain its debt to total capital ratio below 35% in accordance with its stated policy.

2008 Business Plans and Outlook

 Syndicate 780

 The 2008 Business Plan of Syndicate 780 reflects a projected gross premium income target of £114.3 million at Lloyd's Premium Income Monitoring (PIM) exchange rates of US$1.92/£1.00 and a reduction in capacity to £135 million from £150.6 million for the 2007 year of account.

Key components of the 2008 Plan compared with the 2007 year of account Plan and forecast premium income (net of brokerage commission) are set out below at PIM and current rates of exchange:

For the 2007 year of account, forecast premium income of £111.6 million is 15% below plan reflecting:

A 9% reduction arising from the weaker US dollar compared with Lloyd's PIM rates.  Approximately 75% of the Syndicate's premiums are written in US dollars.
The difficulty in developing new lines of business of Cargo, War and Terrorism in the face of the determination of existing players to maintain their shares; and
A shortfall in growth in the Property Insurance and Energy accounts given increasing competition as companies seek to diversify their business.

Syndicate 780's 2008 Business Plan reflects an expected softening in pricing, terms and conditions in light of the absence of major catastrophes to date, particularly in the United States.  The 2008 Plan's return on capacity is 18.5% (before change in managing agency fees) net of a margin for catastrophe losses of 18% of capacity.

Based on the 30 September 2007 exchange rate of US$2.04/£, the Company's 100% share of Syndicate 780's gross premium income for the 2008 year of account of £109.7 million is a 17% increase from its 83.7% share of forecast gross premium income for the 2007 year of account of £93.4 million with the increase in capacity to 100% for 2008 more than offsetting the effects of the weaker US dollar and expected market conditions.

Advent Re

We will continue with the development of Advent Re in 2008 with the ultimate objective of building a reinsurance platform similar in size and scale to Syndicate 780.  On the basis that there are no major catastrophes before year end, Advent Re expects to write gross premium income, before brokerage, of US$15 million to US$20 million including traditional property reinsurance and a limited amount of casualty reinsurance in addition to the retro business it wrote in 2007.

Outlook
The insurance and reinsurance markets continue to undergo significant change as participants react to the increased involvement of capital markets in the securitisation of insurance risk, the geographical dynamics for the placement of reinsurance business and increasing mergers and acquisitions in the Lloyd's market as Bermudan reinsurers seek to diversify their business and deploy excess capital in a competitive market.

 Market conditions have been favourable in 2007 in our principal lines of business with increased competition affecting rates and premium signings. The number of smaller catastrophes outside of the US are not expected to affect pricing significantly while the absence of major US catastrophes to date is likely to result in further pressure on pricing, terms and conditions going into 2008.  We have seen some signs that "sidecar" reinsurance capacity in excess of US$800 million will not be renewed for 2008 although it is still too early to assess the potential impact of this withdrawal of capacity on reinsurance markets.  Our business plans for Syndicate 780 and Advent Re reflect our expectation of softer market conditions albeit we believe that underwriting profitability remains at attractive levels.

 Advent is well placed to take advantage of market opportunities through its long established Lloyd's platform and its trading platform in Bermuda.  We will be alert to opportunities in the market place under the leadership of our experienced underwriting team while maintaining underwriting discipline in the face of increased competition for business".

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