RNS Number:1098R
BarclaysGlbl Inv Endowment Fd II Ld
21 October 2003
Barclays Global Investors Endowment Fund II Limited
Results for the year ended 31 August 2003
Barclays Global Investors Endowment Fund II Limited (BGIEF
II), launched in December 1996, is a Jersey-registered
closed-ended investment company, which invests in a range
of traded with-profits endowment policies; it does not
invest in other UK listed investment companies. The
policies held are written by a wide range of life offices
having a diverse range of policy terms and maturity dates,
thereby seeking to achieve for shareholders a strategic
objective of an attractive level of capital growth
combined with low investment risk.
The Directors have stated their intention to repay the
Company's share capital, together with accumulated
profits, in five annual tranches in each of the years 2005
and 2009, and to wind up the Company after 1 September
2009 distributing all the remaining assets to
shareholders.
Financial results for the year ended 31 August 2003
include:
* Fall in Net Asset Value of 22% or 29.52p per share,
from 122.80p to 93.28p
* Return per ordinary share of -29.52p
* The Company's share price saw no net change over the
period, and stood at 77.0p per share at the year-end. By
comparison the FTSE All Share Index rose during the year
by 0.91%.
Prospective returns after Company expenses to an investor
holding shares to redemption (*see assumptions in Notes to
Editors)
a) 16.0% to an investor buying shares at 77.5p on 30
September 2003
b) 2.9% to an initial shareholder who bought shares at
100p
Commenting on the results, Paul Seymour, Chairman, said:
"TEP values have been hit hard by every bonus
announcement. With no compensating investor demand the
Company's net asset value has consequently fallen sharply
over the year as a whole."
"Despite that, the rates of return from maturing policies
have remained relatively high as the benefits of smoothing
persist, and still look good compared to many alternative
asset classes."
"If comments from within the life offices are true that
operating conditions of the past year are, indeed, the
worst ever seen in the life industry, it may also be the
case that the worst is over."
"I suspect that recovery will be protracted, and that even
when the costs of introducing new regulations have been
absorbed, returns to policyholders are likely to be modest
for some time to come."
-Ends-
For further information please contact:
Barclays Global Investors Endowment Fund II Limited
Paul Seymour 01242 547 477
Barclays Global Investors Limited
Glenn Houchell 020 7668 8089
Weber Shandwick Square Mile
Roddy Watt 020 7067 0708
Chairman's Statement
Overview
The general background for TEP investment has remained
very poor throughout the year, though the business outlook
and the rise in equity market values since March have been
more positive. In contrast to previous years, when the
Company's net assets and share price have held up very
well relative to general UK equity prices, this year the
accumulation of problems for the life industry seems to
have grown. This has resulted in draconian cuts to
bonuses, with the inevitable result that TEP values have
been hit hard by every bonus announcement.
With no compensating investor demand the Company's net
asset value has consequently fallen sharply over the year
as a whole. Despite that, the rates of return from
maturing policies have remained relatively high as the
benefits of smoothing persist, and still look good
compared to many alternative asset classes. I am
optimistic that stock market recovery will help life
offices to stabilise bonus levels, and believe that
policyholders' funds are under better management and
regulatory control than for some years.
Results for the year
Over the year to 31 August 2003 the Company's net asset
value (NAV) fell by 29.52p per share, or 24.0%, from
122.80p to 93.28p per share. Although fluctuating
considerably in the course of the year, the Company's
share price saw no net change over the period, and stood
at 77.0p per share at the year-end. By comparison the FTSE
All Share Index rose during the year by 0.91%, and the 5-
15 year Government Bond Index saw a decline of 1.35%.
Investment background and share price performance
Despite the poor business background for the year as a
whole, economic data published in recent months has
gradually become more positive, so that stock markets
since March have responded with optimism. It was
interesting to note that the Company's net asset value and
share price, having fallen for most of the twelve months
in response to the deep cuts in bonuses, seem to have
stabilised since the spring, though we have not yet seen
any signs of recovery.
The questions now for with-profits policyholders relate to
how much of the positive economic and market optimism will
translate into policy returns and how much is likely to be
absorbed by costs of rebuilding smoothing reserves,
meeting solvency ratios or new regulatory requirements,
life office restructuring, or supporting low cost products
such as stakeholder pensions. It seems safe to assume that
there will be no early return to bonus increases for most
life offices, though I believe that the life industry is
probably in the process of gaining a more secure long term
footing than before.
Bonus trends
Reductions in both annual and terminal bonuses have been
conspicuous. The sharpness of the downward trend continued
throughout the year and probably surpassed in severity
anything seen since the 1930's - possibly ever. After
whittling away annual bonuses to fairly low levels in the
course of recent years, the major offices announced during
the reporting period an average annual bonus rate at just
half the rate of the previous year.
Maturity payouts, incorporating terminal bonuses, have
also suffered heavily, and yet a number of authoritative
reports have stated in recent months that payouts on with-
profits policies have provided returns that still compare
well with other asset classes. For instance, according to
Money Management Magazine with-profits policies
outperformed funds in the Balanced Managed, and UK All
Companies sectors over 10, 15, 20 and 25 years.
Payouts on some maturing with-profits policies may still
be above their underlying asset shares. To that extent the
maturity payouts on long-term polices issued by those life
offices could continue to fall for a time. While it is
probably the case that most payouts have now been brought
back into line with asset shares as a result of recent
cuts in terminal bonuses, we should nevertheless expect
cuts in payouts for some years to come as a result of the
shift from the high return environment of the 1980s and
early 1990s to the relatively low growth economies of
today. It is also the case that smoothing reserves will
need to be rebuilt.
Guaranteed sums
I wrote to shareholders in October 2002 to make the point
that the value of each policy held by your Company is not
based only on the current value of the assets backing the
policy but is also protected by a sum that is guaranteed
by life offices under the with-profits contract. The
purpose of my writing at that time was to point out that
the guaranteed element is made up of the sum assured and
attaching annual bonuses which, once declared, cannot be
withdrawn subsequently because stock market conditions are
poor,, and therefore acts to increase the guaranteed value
backing each policy.
Between October 2002 and June 2003 we published monthly
not only the value per share of the guaranteed sums less
future premiums, but also the illustrative rates of return
based on those guaranteed sums. I am very sorry to say
that the Managers discovered an error in the model that
performs the latter calculation. Although the published
guaranteed sums per share were correct, the rates of
return based on the share price were overstated by about
5% per annum. Because of the fundamental difficulties in
the basis of calculation, we decided to discontinue
publication of such returns after June 2003.
Outlook
If it is true that the operating conditions of the past
year are, indeed, the worst ever seen in the life
industry, it may also be the case that the worst is over.
It might be comforting for me to suggest that we could see
an early return to bull markets based on solid growth in
the major economies, combined with a more confident life
industry, operating securely and profitably within its new
regulatory framework. I suspect, however, that recovery
will be protracted, and that even when the costs of
introducing new regulations have been absorbed, returns to
policyholders are likely to be modest for some time to
come.
The Directors' intend to make the first redemption of the
Company's share capital in less than two years time. Given
the recent history of policy payouts, it seems unlikely at
this time that the redemption price per share can be much
higher than the current net asset value. Nevertheless, I
believe that we are likely to see some increases in policy
maturity values later in the life of the Company, so that
there should be scope for redemption payments at higher
levels in subsequent years. The table on page 13
illustrates the kind of attractive return that a buyer at
the current share price could expect.
Paul Seymour, Chairman
16 October 2003
Manager's Review
Economic and market background
The US stock market has risen about 25% since its low
point on the eve of the Iraq war and currently stands at
its highest level in a year. Although the early stages of
the rally were driven more by sentiment, it has probably
been the improving flow of economic news, particularly
consumer spending, which has prolonged market momentum.
A slightly different picture has emerged in Japan where
the economy has performed better than investors dared
hope. A striking increase in capital investment combined
with strong, if erratic, industrial production has given
way to prospects of good export-led recovery. However, it
looks unlikely that recent economic growth rates will be
sustained, and the Japanese equity market recovery may now
slow.
By contrast, European activity remains sluggish despite
some improvement in confidence among economists and
investors. In the first half of the year Germany, Italy,
Switzerland and the Netherlands all succumbed to
recession. Despite that, European equity markets have
risen sharply since their low points in March, performing
almost as well as the US and Japan.
In the UK it is still mainly retail consumption that is
driving the economy. An unexpectedly severe slowdown in
consumer spending growth during the first half of the
year, together with the weak overseas climate, persuaded
the Bank of England to cut interest rates. Since then
household spending has proved surprisingly robust, but
with debt standing at a record 120% of income this may not
last. Some commentators believe that weaker sterling may
now help raise industrial production through exports and
overseas earnings.
Meanwhile, UK investors have received little help from the
gilt market, which is close to its low point for the year.
The substantial 27% rise in the FTSE All Share Index since
its March low point may look too optimistic, perhaps due
to relief following the Iraq conflict and an increased
appetite for risk. However, some market analysts consider
that emerging global recovery combined with the outlook
for UK corporate profits still leave room for UK equity
prices to rise significantly.
The life assurance industry
Most of the issues faced by life offices during the period
were not new, though the relative importance of matters
shifted subtly. Despite some recovery in stock market
values since March, sector news has been dominated for
most of the year by continuing reports of the negative
impact of stock market returns on life funds and the
resulting poor bonuses.
The decline in strength of some life company balance
sheets as a result of weak markets has caused the rating
agencies to reduce some individual credit ratings,
including those for parts of the Aviva group, and Royal &
Sun Alliance.
During the year a number of offices responded to the FSA's
invitation to request waivers in respect of solvency
ratios releasing them from obligations to make forced
sales of equities. According to one estimate the current
bear market has caused a #50 billion loss in the value of
endowment and pension policies issued by UK life offices.
However, there is now some evidence that, despite the well-
publicised pressure last year to sell down equities in
favour of bonds in order to meet solvency requirements,
the proportion of equities in most life funds has been
reduced more by the relative movements in equity and bond
prices than by switching one asset class to the other.
This should provide some optimism about the benefits that
would accrue in the event of a significant recovery in the
equity markets.
In some cases poor investment returns have seriously
threatened solvency, though the grave struggles for
survival that some offices faced earlier in the year have
now largely diminished with the recovery in market levels
and measures taken to shore up balance sheets. A number of
offices are reported to be operating at solvency ratios
just above those set by the FSA, while others are no
longer accepting new business. This situation is
paralleled in many overseas jurisdictions where it has
also produced corporate restructuring, asset sales, rights
issues, job cuts, and at least one insolvency in Germany.
To put the problem into perspective, a Nottingham
University study states that in 2002 the average free
asset ratio of UK life offices dropped from 22.9% to 6.6%.
Bonus trends
We have seen repeated cuts in bonuses throughout the year,
with most offices making more than one announcement, and a
number of them indicating that further cuts are likely. By
contrast, the Prudential's August interim report read
fairly positively, with indications that the company does
not intend to cut payouts in the foreseeable future,
believing the decline in investment returns to be over.
Clearly, the investment experience is mixed, emphasising
the importance of selecting policies from the stronger
offices, but it is significant that the average cut in
annual bonus rate declared by the major offices since 2000
is over 52%.
Regardless of the Prudential's optimism, we believe that
some life offices are still paying out at maturity sums in
excess of asset shares. Indeed, Standard Life, as one of
the best performing offices, has put itself in this
category. It seems possible that some firms in such a
position will feel obliged to continue to reduce payouts
in the near future in order to bring them back into line
with asset shares, and we anticipate a further reduction
in the average annual return on policies held by the
Company.
Regulations and corporate governance
Last year the FSA declared its intention to introduce a
number of changes to improve the way in which life offices
are run and the way in which life products are sold. These
changes were proposed in response to public concerns, and
the FSA and Treasury Select Committee actively questioned
many of the long-standing practices in the life industry.
Indeed, many commentators questioned the FSA's own
handling of the Equitable Life affair. Besides, the
Sandler Report on Medium and Long-Term Savings, which was
published in 2002, made a number of recommendations for
the treatment of with-profits products by life offices and
intermediaries.
Amongst the most important of FSA initiatives since then
has been its proposed new set of rules to determine how
much capital should be held by life offices, and to link
this more directly to how bonus payments are made to
policyholders in practice.
The proposals aim firstly to change the way firms
calculate the financial resources they need to hold in
order to "provide an adequate degree of certainty that
they will be able to make contractual and expected
discretionary payments, such as terminal bonuses."
Secondly, they will require a firm to conduct "stress and
scenario testing to test the overall adequacy of its
financial resources". This means that offices will be
required to hold larger amounts of capital to cover the
risks inherent in smoothing. Measures are also proposed to
make reporting requirements more transparent and frequent.
Importantly, these proposals have also been framed in
order to deal with problems resulting from falling equity
markets last year and earlier this year. At that time life
funds that may have wished to continue holding equities in
the expectation of longer term gains came under short term
pressure to sell equities to meet the reserving
requirements of current FSA solvency ratios. The new
proposals aim to provide policyholders with some
protection from the risk that their terminal bonuses may
be adversely affected by a temporary downturn in the
market.
The consultation process for the new proposals is expected
to be complete by Spring 2004, with implementation due
later that year. Also, the FSA will introduce later in
2004 its planned change from the "appointed actuary
regime" by which life and pensions products are internally
regulated, to a regime with an "actuarial function holder"
and a "with-profits actuary". It is envisaged that under
the new regime auditors will have a wider responsibility
for scrutinising policyholder liabilities and that
directors will have an obligation to certify the values of
the liabilities.
Consolidation and rationalisation
Without doubt, life offices still face considerable
pressures on their balance sheets and revenue accounts, as
they were at this time a year ago. Most of the underlying
causes are the same as they were then, and most of the
solutions too.
The effects over recent years of having to cope with the
costs of mis-selling pensions and other with-profits
products, of shrinking asset values - in some cases
leading to solvency breaches, of recession and a poor
business environment, as well as the need to deal with new
regulatory measures, have combined to produce intolerable
conditions for much of the industry. The proposed new
regulatory measures, however commendable, will impose a
further burden on life offices.
A year ago it was clear that these conditions were leading
to further reductions in maturity payouts and dividend
cuts for the proprietary companies. This process has
continued, and many offices have since then also sold
assets and cut staff numbers to improve viability, while a
number of major groups, including Legal & General, Royal
Sun Alliance, and Aviva, have raised new capital or
restructured in order to strengthen their financial
resources.
We are likely to see a continuation of these measures in
the foreseeable future, and in some cases this will mean a
new willingness to merge or be taken over, or to raise new
capital in order to strengthen balance sheets. In short,
management in the industry is likely to employ any
strategy to ensure survival, in many cases without hope of
much business expansion in the near term.
Traded Endowment Policies
Faced with an uncertain background and sharply reduced
investment demand, the TEP market has remained disorderly
and confused during the year. It has been characterised by
widely differing prices between market makers and a
relatively low volume of policies traded compared to
levels seen 18 months ago.
The absence of pricing information in the market place and
the lack of a clear and consistent market structure for
pricing discount rates (PDRs) at any one time has meant
that we have been unable to use confidently the prices in
the secondary market as the basis for our own portfolio
valuations.
The lack of any clear market trend has led us to leave the
PDR basis of our valuation unchanged throughout the year,
though we have been able to rely to some extent on
estimated asset shares backing each policy as a basis of
fundamental value. In any case, we have aimed to be
conservative in our monthly and yearly valuations.
Activity by the Company
Windfall gains this year have been minimal. There were no
gains received from demutualisations or other corporate
activity, and just #97,748 was received from claims as a
result of five deaths.
In order to finance its running costs and pay policy
premiums during the year the Company borrowed a total of
#2.20 million plus rolled up interest of #542,000, making
the total additional amount drawn on the borrowing
facility during the year #2.74 million, and bringing the
total amount of outstanding debt under the facility to
#14.09 million. Amounts have been borrowed at rates
between 3.87% and 4.48% p.a. during the year.
Outlook
Although some stock markets seem to have run ahead of
earlier expectations, most analysts agree that the
improving outlook in most developed economies will help
lift equities further over the medium term. Even
Continental European markets seem able to run further,
despite depressed economies, because many of their large
multinational companies are likely to benefit from
recovery elsewhere in the world.
Although equities now represent less than 50% of many life
fund portfolios, the impact of any sustained market
recovery on with-profits policies would be extensive in
the long run. Life office balance sheets have already
reflated to some extent with the recovery in stock market
levels. Since net surplus assets now stand in excess of
policyholder liabilities solvency is probably assured for
the great majority of offices. The overall welfare of the
industry depends substantially on the performance of the
markets and the asset allocation strategies of individual
businesses, together with the geographical mix of their
business activities.
Besides a direct impact on net assets, continuing good
market performance would be likely to have a number of
other beneficial effects for policyholders. Importantly,
sales of with-profits products should increase with the
growth of consumer confidence, and the costs of meeting
new regulatory measures will be more easily achieved to
the advantage of policyholders.
Although economies and stock markets may have turned, life
funds are not yet totally out of trouble. In order for the
benefits of economic and market recovery to be realised in
the form of increased bonuses it will be necessary for
smoothing accounts to go through a period of adjustment in
which the over-payments of recent years are off-set by a
period of under-payment. This process could take several
years to complete, but we anticipate some restoration of
bonus levels as soon as conditions allow.
Barclays Global Investors Limited
16 October 2003
Statement of Total Return
(incorporating the Revenue Account) for the year ended 31
August 2003
2003 2002
Note Revenue Capital Total Revenue Capital Total
# # # # # #
______________________________________________________________________________________________
Realised gains
on investments 1 - 39,998 39,998 - 182,437 182,437
Movement in
unrealised gains
on investments 6 - (6,269,911) (6,269,911) - (1,913,614) (1,913,614)
Interest
income 2 1,606 - 1,606 4,314 - 4,314
Administrive
expenses 3 (611,817) - (611,817) (635,515) - (635,515)
______________________________________________________________________________________________
Net
return
before
finance
costs (610,211) (6,229,913) (6,840,124) (631,201) (1,731,177) (2,362,378)
Interest
payable 10 (539,312) - (539,312) (464,916) - (464,916)
______________________________________________________________________________________________
Return on ordinary
ordinary activities
for the financial
year (1,149,523) (6,229,913) (7,379,436) (1,096,117) (1,731,177) (2,827,294)
______________________________________________________________________________________________
Transfer
from 13,
reserves 14(1,149,523) (6,229,913) (7,379,436) (1,096,117) (1,731,177) (2,827,294)
______________________________________________________________________________________________
Return per
Ordinary
Share 5 (29.52p) (11.31p)
______________________________________________________________________________________________
Change in Net Asset Value per Share 2003
______________________________________________________________________________________________
Net asset value per share as at 31 August 2002 122.80p
Revenue return per Ordinary Share (4.60p)
(comprising Interest income less Administrative expenses and Interest payable)
Net unrealised loss per Ordinary Share (24.92p)
(comprising Realised gains on investments and Movement in unrealised gains on
investments)
______________________________________________________________________________________________
Change in net asset value per Ordinary Share (29.52p)
______________________________________________________________________________________________
Net asset value per share as at 31 August 2003 93.28p
______________________________________________________________________________________________
Balance Sheet as at 31 August 2003
2003 2002
Note # # # #
_____________________________________________________________________________________
Fixed Assets
Investments 6 37,265,153 42,023,745
Current Assets
Debtors 8 16,906 6,394
Cash at Bank 291,874 200,896
_____________________________________________________________________________________
308,780 207,290
Creditors
Amounts falling due
within one year 9 (164,049) (184,148)
_____________________________________________________________________________________
Net Current Assets 144,731 23,142
_____________________________________________________________________________________
Total Assets less
Current Liabilities 37,409,884 42,046,887
Creditors: amounts
falling due after more
than one year 10 (14,089,333) (11,346,900)
_____________________________________________________________________________________
Net Assets 23,320,551 30,699,987
_____________________________________________________________________________________
Capital and Reserves
Called up Share Capital 11 250,002 250,002
Share Premium 12 24,750,000 24,750,000
Capital Reserve 13 4,132,758 10,362,671
Revenue Reserve 14 (5,812,209) (4,662,686)
_____________________________________________________________________________________
Shareholders' Funds 15 23,320,551 30,699,987
_____________________________________________________________________________________
Approved by the Board on 16 October 2003 and signed on its
behalf by:
Paul A.C. Seymour Peter A.N. Bailey
Cash Flow Statement for the year ended 31 August 2003
2003 2002
# # # #
_____________________________________________________________________________________
Net cash outflow from
operating activities
(Note 1)
(637,701) (686,969)
Capital expenditure
and financial
investment
Payments to acquire
fixed asset
investments (129,898) (485,887)
Payments of premiums (1,439,171) (1,439,701)
Cash received from
disposal of policies - 15,871
Cash received from
policies ceasing on
death 97,748 172,375
Receipts from
windfall on policies - 178,180
_____________________________________________________________________________________
Net cash outflow from
capital expenditure
and financial
investment (1,471,321) (1,559,162)
Net cash outflow
before financing (2,109,022) (2,246,131)
Financing
Increase in loan 2,200,000 1,950,000
_____________________________________________________________________________________
Net
increase/(decrease)
in cash 90,978 (296,131)
_____________________________________________________________________________________
Reconciliation of net 2003 2002
cash flow to movement # #
in net debt
_____________________________________________________________________________________
Increase/(decrease)
in cash in the year 90,978 (296,131)
Drawdown of loan
facility (2,200,000) (1,950,000)
Increase in
borrowings due to
rolled up interest (542,433) (670,795)
Net debt at 1
September 2002 (11,146,004) (8,229,078)
_____________________________________________________________________________________
Net debt at 31 August 2003 (13,797,459) (11,146,004)
_____________________________________________________________________________________
Notes to the Cash Flow Statement
1. Reconciliation of net return before finance costs to
net cash outflow from operating activities
2003 2002
# #
__________________________________________________________________________________
Net return before finance costs (610,211) (631,201)
Increase in revenue account debtors (10,512) (1,984)
Decrease in revenue account creditors (16,978) (53,784)
__________________________________________________________________________________
Net cash outflow from
operating activities (637,701) (686,969)
2. Analysis of net debt
As at Cash flows Non-cash flow As at 31
1 September 2002 movement August 2003
# # # #
_________________________________________________________________________________
Cash at bank 200,896 90,978 - 291,874
Borrowings (11,346,900) (2,200,000) (542,433) (14,089,333)
_________________________________________________________________________________
(11,146,004) (2,109,022) (542,433) (13,797,459)
Notes to the Financial Statements for the year ended 31 August 2003
Principal Accounting Policies
The financial statements have been prepared under the
historical cost convention, as modified for the
revaluation of investments, and in accordance with United
Kingdom generally accepted accounting principles. The
Directors consider that the accounting policies set out
below are suitable, have been consistently applied, and
are supported by reasonable judgements and estimates.
Statement of Recommended Practice
The financial statements have been prepared in accordance
with the Statement of Recommended Practice issued by the
Association of Investment Trust Companies in December
1995.
Revenue and expenses
Deposit interest and expenses are accounted for on an
accruals basis.
Investments
Investments are included in the Balance Sheet at valuation
and a corresponding capital reserve established to reflect
differences between value and cost.
Endowment policies have been valued by the Consulting
Actuary (N.H. Taylor FIA, ASA) as at 31 August 2003. The
method used calculates a formula maturity value for each
policy by reference to current reversionary bonus and
terminal bonus rates. Using standard actuarial formulae, a
pricing discount rate, fixed by the Consulting Actuary, is
then applied to the formula maturity value and future
premium liabilities to give the net present value of each
policy. The base pricing discount rates used by the
Consulting Actuary in his valuation as at 31 August 2003
were 9.25% for policies maturing up to 31 August 2005,
9.75% for policies maturing between 1 September 2005 and
31 August 2007, and 10.25% for policies maturing
thereafter. Adjustments are then made to the base pricing
discount rates by the Consulting Actuary to reflect the
particular circumstances of some life offices. (The base
pricing discount rate used by the Consulting Actuary in
his valuation as at 31 August 2002 was 9.25% for policies
maturing up to 31 August 2005, 9.75% for policies maturing
between 1 September 2005 and 31 August 2007, and 10.25%
for policies maturing thereafter). No allowance is made
for mortality. Premiums are accounted for on a paid basis,
and are treated as an increase in the cost of investment.
The valuation of any listed investments is based on mid-
market prices at the close of business on the last
business day of the year.
Recognition of windfall gains
Windfall gains from demutualisations and other corporate
activity are accrued once they receive Court or other
relevant approval. Where there is uncertainty as to the
amount of any windfall the Directors' accrue on a
conservative basis.
1. Realised Gains on Investments
2003 2002
# #
_________________________________________________________________________________
Gains on policies ceasing on
death of the life assured 39,998 69,514
Gains on policies surrendered
or sold - 4,743
Windfall gains* - 108,180
_________________________________________________________________________________
39,998 182,437
_________________________________________________________________________________
* Windfall gains in 2002 comprised amounts received
from the demutualisation of Scottish Provident that
were in excess of the amounts accrued and recognised
in the previous year.
2. Interest Income
2003 2002
# #
_________________________________________________________________________________
Interest on bank deposits 1,606 4,314
_________________________________________________________________________________
3. Administrative Expenses
2003 2002
# #
_________________________________________________________________________________
Investment management fee* 213,410 219,343
Administrative and secretarial fees 57,176 69,290
Other policy administration services 209,896 219,343
Banks' commitment fees and other charges 27,470 23,943
Directors' emoluments 27,500 27,500
Auditors' remuneration 11,500 9,963
Other expenses 64,865 66,134
_________________________________________________________________________________
611,817 635,515
_________________________________________________________________________________
* The terms of the investment management agreement
are set out on page 17.
Directors' emoluments disclosed above include amounts paid to:
2003 2002
# #
_________________________________________________________________________________
Chairman and highest paid Director 7,500 7,500
4. Taxation
The Company qualifies as a Jersey Exempt Company and
is not subject to taxation, other than Jersey Exempt
Company fee of #600 per annum (2002: #600).
5. Return per Ordinary Share
Return per Ordinary Share has been calculated by
dividing the total investment return for the year of
(#7,379,436) (2002: loss of #2,827,294) by the average
number of Ordinary Shares in issue of 25,000,000
(2002: 25,000,000).
6. Fixed Asset Investments
Endowment Policies 2003 2002
# #
_________________________________________________________________________________
Cost
Balance as at 1 September 2002 26,554,016 26,165,247
Cost of policies purchased during the year 129,898 485,887
Cost of policies surrendered or sold - (11,128)
Cost of policies ceasing at death (45,522) (85,990)
_________________________________________________________________________________
Balance as at 31 August 2003 26,638,392 26,554,016
_________________________________________________________________________________
Premiums
Balance as at 1 September 2002 6,496,783 5,073,953
Premiums paid in year 1,439,171 1,439,701
Transferred on death (12,228) (16,871)
_________________________________________________________________________________
Balance as at 31 August 2003 7,923,726 6,496,783
_________________________________________________________________________________
Unrealised appreciation
Balance as at 1 September 2002 8,972,946 10,886,560
Decrease in year (6,269,911) (1,913,614)
_________________________________________________________________________________
Balance as at 31 August 2003 2,703,035 8,972,946
_________________________________________________________________________________
Valuation as at 31 August 2003 37,265,153 42,023,745
_________________________________________________________________________________
7. Contingent Liabilities and Commitments
At 31 August 2003 there were no contingent liabilities.
Future premiums payable in respect of endowment
policies held at 31 August 2003 were as follows:
2003 2002
# #
_________________________________________________________________________________
Due within one year 1,392,209 1,440,651
Due after more than one year 3,061,447 4,446,452
_________________________________________________________________________________
4,453,656 5,887,103
_________________________________________________________________________________
8. Debtors
2003 2002
# #
_________________________________________________________________________________
Other debtors 16,906 6,394
_________________________________________________________________________________
9. Creditors
2003 2002
# #
_________________________________________________________________________________
Amounts falling due within one year:
Other creditors 164,049 184,148
_________________________________________________________________________________
10. Bank Facility
Under an agreement dated 21 November 1996 between the
Company and Barclays Bank PLC, Barclays Bank PLC
agreed to make available a revolving credit facility,
amounting initially to #22 million, for the purpose of
financing, inter alia, the payment of policy premiums
and the interest, fees and ongoing management and
administrative expenses payable by the Company. This
facility has subsequently been reduced to #18 million.
Under its terms the Company pays interest at 0.45 per
cent over the London Inter-Bank Offered Rate on the
drawn portion of the facility. The Company also pays a
commitment fee of 0.225 per cent per annum on the non
utilised portion of the facility. The Company's
obligations to Barclays Bank PLC under the facility
are secured on the basis of a fixed and floating
charge over the Company's undertakings and assets and
is repayable over the years 2005-2009.
Interest payable for the year in respect of this
facility was #539,312 (2002: #464,916). These charges
were funded from the principal amounts drawn down.
The movement of the borrowings under the facility were
as follows:
2003 2002
# #
_________________________________________________________________________________
Drawn portion of the facility
as at 1 September 2002 11,346,900 8,726,105
Principal amounts drawn down in the year 2,742,433 2,620,795
_________________________________________________________________________________
Drawn portion of the facility
as at 31 August 2003 14,089,333 11,346,900
_________________________________________________________________________________
11. Called up Share Capital
2003 and 2002
#
_________________________________________________________________________________
2002 and
Authorised
Equity: 25,000,000 Ordinary Shares of 1p each 250,000
Non equity: 200,000 Preference Shares of #1 each 200,000
_________________________________________________________________________________
450,000
_________________________________________________________________________________
Allotted and fully paid
25,000,000 Ordinary Shares of 1p each 250,000
2 Preference Shares of #1 each 2
_________________________________________________________________________________
250,002
_________________________________________________________________________________
The preference shares do not confer any rights to
dividends. They do not have voting rights except where
the rights of the preference shares are to be varied
but have a preferential right to return of capital on
a winding up.
12. Share Premium
2003 2002
# #
_________________________________________________________________________________
Balance as at 31 August 2003 and
1 September 2002 24,750,000 24,750,000
_________________________________________________________________________________
13. Capital Reserve
Realised Unrealised Total
# # #
_________________________________________________________________________________
Capital reserve at 1 September 2002 1,389,725 8,972,946 10,362,671
Realised gains on investments 39,998 - 39,998
Unrealised depreciation on
investments for the year - (6,269,911) (6,269,911)
_________________________________________________________________________________
Capital reserve at 31 August 2003 1,429,723 2,703,035 4,132,758
_________________________________________________________________________________
14. Revenue Reserve
2003 2002
# #
_________________________________________________________________________________
Balance as at 1 September 2002 (4,662,686) (3,566,569)
Deficit for the year (1,149,523) (1,096,117)
_________________________________________________________________________________
Balance as at 31 August 2003 (5,812,209) (4,662,686)
_________________________________________________________________________________
The Fund is not intended to generate revenue returns,
and all return is in the form of capital.
15. Reconciliation of Movements in Shareholders' Funds
2003 2002
# #
_________________________________________________________________________________
Deficit for year (1,149,523) (1,096,117)
Recognised capital losses for this year (6,229,913) (1,731,177)
_________________________________________________________________________________
Net decrease in Shareholders' Funds (7,379,436) (2,827,294)
Opening Shareholders' Funds 30,699,987 33,527,281
_________________________________________________________________________________
Closing Shareholders' Funds 23,320,551 30,699,987
_________________________________________________________________________________
Shareholders' funds are attributable to each class of
share as follows:
2003 2002
# #
_________________________________________________________________________________
Equity shares 23,320,549 30,699,985
Non-equity shares 2 2
_________________________________________________________________________________
23,320,551 30,699,987
_________________________________________________________________________________
16. Financial Instruments and Risk
The Company's investment policy is to seek an
attractive level of capital growth combined with low
risk by investing in a range of traded endowment
policies. The policies are written by a number of life
offices with a diversified range of policy terms and
dates. It is the intention of the directors to redeem
one fifth of the Company's shares in each of the years
2005 to 2009.
To achieve this policy the Company must hold or enter
into financial instruments, which may include:
* Traded endowment policies, fixed income deposits;
* Cash, liquid resources and short-term debtors and
creditors that arise directly from its activities; and
* Revolving credit facilities to enable the payment of
policy premiums and other company expenses.
The holding of financial instruments pursuant to the
above investment policy involves certain inherent
risks. Events may occur that would result in a
reduction in the Company's net assets.
The main risks arising from the Company's financial
instruments are listed below together with the
policies adopted by the Board to manage these risks.
The policies adopted by the Board have remained
unchanged since the launch of the Company.
Market Price Risk
Market risk arises mainly from uncertainty surrounding
reversionary and terminal bonus rates declared by life
offices, affecting policies held. Market values and
ultimately returns to shareholders are adversely
affected to the extent that life offices reduce bonus
rates or that interest rates are increased, which may
affect the pricing discount rates on which TEPs are
valued.
It is the policy of the Company to minimise the risk
of short-term market price fluctuations by holding
policies to maturity rather than actively trading the
portfolio. However, in the long-term shareholder
returns will be dependent on bonus rate declarations.
The Company also minimises market price risk by
requiring that the Manager meets regularly with the
Consulting Actuary to consider the asset allocation of
the portfolio in order to manage the risk associated
with particular life offices whilst continuing to
follow stated investment policies.
Foreign Currency Risk
It is the policy of the Company only to invest in
sterling denominated with-profit endowment policies,
and as a result it faces no direct foreign currency
risk.
Assignment Risk
Investing in traded endowment policies exposes the
Company to a higher than average risk that good title
is not passed on acquisition of a new policy.
It is the policy of the Company to minimise the risk
by buying and selling endowment policies only through
an approved market maker who is responsible for
ensuring that each assignment is legal and good title
is passed to the Company.
Management of Liquid Resources
It is the policy of the Company to maintain only
minimal holdings of cash. In the event of large cash
proceeds arising from deaths or de-mutualisations,
fixed deposits are made only as a temporary measure
whilst appropriate endowment policies are sought in
the market or pending repayment of the outstanding
loan.
Interest Risk Rate on Borrowing facility
As set out in the prospectus, it is the policy of the
Company to fund premiums payable on traded policies
and operating expenses of the Company with bank
borrowings. It is currently the Company's policy to
borrow at short-term interest rates. Under the loan
facility agreement the Company has the option to
borrow at periods of up to 12 months. Longer periods
may be arranged by special negotiation.
The Company, as a result of its use of bank
borrowings, is exposed to the risk of movements in
interest rates. Rises in interest rates would increase
the cost of the Company's borrowings and reduce
returns to shareholders. The applicable terms and
rates associated with bank borrowings as at the year-
end are set out in Note 10.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR FEFFUSSDSELS