PRELIMINARY ANNOUNCEMENT OF RESULTS
For the period from incorporation, 27 February 2004, to 30 June 2005
CHAIRMAN'S STATEMENT
Review
My interim report commented on the slow but steady pace of acquisition of
policies and it is therefore pleasing to report substantial progress since
then, with the acquisition of the TLI portfolio now nearing completion.
At 30 June 2005, the cost of policies acquired was US$25.5 million with a
further US$24.1 million in the process of completion, making a total of US$49.6
million. By 30 September 2005, these figures had risen to US$43.7 million
acquired and US$12.0 million in the process of completion, making a total of
US$55.7 million. Active bids of over US$150 million are outstanding and, given
the intended portfolio of around US$85 million, the intention now is to focus
on converting sufficient of these bids and closing the accepted bids in order
to complete the portfolio. In addition, bids continue to be negotiated for a
portfolio of policies which, if successful, will bring the process of portfolio
completion to a more rapid conclusion.
In the process of bidding, Surrenda-link have analysed policies with a face
value of over US$9 billion and made bids on policies with a face value of
US$2.5 billion. As at 30 September 2005, there were 81 policies in portfolio
(excluding one previously matured policy) representing 70 separate insured
lives. The average age of the insured lives is 82.5 years and the average life
expectancy is approximately 7.5 years.
As at 30 September, the Company had a further 20 policies where the purchase
process was close to completion, and a further 14 policies where bids had been
accepted. This amounts to 115 policies in total which compares to our target of
at least 130 policies representing in excess of 100 separate insured lives.
The current annual premium requirements in respect of the existing policies in
portfolio amount to approximately $4.5 million. The aggregate amount which
would become payable upon maturity of the whole of the current portfolio is
approximately $142 million.
We have commented before about the market practice of "gazumping" bids at an
advanced stage of negotiation. What is therefore particularly encouraging about
these statistics is the current conversion of bids to policies in portfolio.
The increase in the conversion rate between the end of June 2005 and the end of
September, as detailed above, reflects much hard work by Surrenda-link, in
particular.
The market for TLIs remains active with continuing evidence of aggressive
bidding. It has nevertheless been possible to acquire policies at reasonable
prices by being patient and by adopting a consistent approach.
Valuation
In the interim report, I commented on the basis of valuation for policies
acquired and indicated that the Board would be keeping this matter under
review. Until the end of July, the valuation basis adopted by the Directors
assumed that the appropriate discount rate for valuation purposes was the
internal rate of return on each policy calculated at the time of purchase. This
meant that policy valuations as at the date of purchase were equal to their
cost and ongoing policy values tended to increase broadly in line with the cost
of premiums, after allowing for the running expenses of the Company.
Whilst this method had the merit of being conservative, it had become
increasingly apparent to the Board that the level of activity in the secondary
market had resulted in a significant increase in prices for policies. This was
reflected in the higher prices paid by the Company for more recently acquired
policies, but until the end of August had not been reflected in the valuation
of policies previously acquired.
There is no official source of secondary price information for US Traded Life
Interests. Nevertheless, Surrenda-link as investment manager, through its
extensive contacts, is in a position to advise the Board on market price
movements from time to time and their impact on the value of the policies held
by the Company on an ongoing basis. Their advice is based on the prices at
which policies are currently being offered for sale and/or acquired, adjusted
for anomalous secondary market trades.
Accordingly, and with effect from the end-August valuation, the Board now takes
such advice on market price movements fully into account in arriving at an
appropriate valuation for the Company's portfolio. It should, however, be
cautioned that the valuation of the TLI portfolio should not be taken as an
indication of the price which might be obtained if all or part of the portfolio
were to be sold in the market.
The published net asset value per share of the Fund as at 31 August 2005 was
104.3 pence, calculated on this new basis.
Gearing
It remains the intention of the Board that the Company will incur bank
borrowings equal to approximately 20 per cent. of the net assets of the Fund
once fully invested. It also remains the intention of the Board that, as
policies mature, the level of gearing will be reduced as appropriate.
The Company currently has a bank facility in place with Allied Irish Banks for
a committed amount of up to $15 million. The Company will keep the level of the
committed facility under review with reference to the maturity profile of the
portfolio and the ongoing premium requirements. It may be appropriate to seek a
short-term increase in the committed amount under the facility in the event
that the maturity profile of the portfolio does not match current expectations.
Total return projections
The original prospectus included a table of illustrative total returns on
various assumptions. It has always been your Board's intention to publish
revised total return projections once the portfolio was substantially complete
and it is felt that, with reference to the policies actually in portfolio and
in progress, this point has now been reached. Although the result of such
projections can be simply expressed as a single percentage figure or a range of
figures, this is a complex calculation which involves not only projections of
cash flow for each individual policy but actuarial assumptions as to interest
rates and mortality as well as estimates of market prices for the sale of the
eventual "rump" of policies which have not matured by the planned date of
winding up in 2012. The Board and the Investment Manager have spent
considerable time on refining these projections both as to their accuracy and
their methodology (for example in the treatment of foreign exchange hedging).
The table below sets out a range of illustrative returns in respect of an
equity investment in the Fund over the life of the Fund with reference, in
particular, to potential changes in life expectancy and variations in the
realisation value of policies still in portfolio at the end of the
Fund's life. The projections are based on the portfolio as at the end of August
2005. It should be noted, in particular, that potential changes in life
expectancy are shown by reference to the medically assessed life expectancies
of the policy lives insured at the time of acquisition bythe Fund, which are
based primarily on one or more medical assessments made by specialist firms at
that time.
Illustrative redemption yields (% per annum)
Mortality Proportion Exit - 10c - 5c At Exit + 5c + 10c
Assumption Surviving Price Price
Note 2
Note 1 Note 3
-18 months 37.2% 43.87c 10.1% 10.7% 11.2% 11.7% 12.2%
- 6 months 45.4% 44.17c 7.5% 8.3% 9.0% 9.7% 10.4%
Central 48.6% 44.27c 6.4% 7.3% 8.1% 8.9% 9.7%
+6 months 52.1% 44.36c 5.1% 6.1% 7.1% 8.0% 8.8%
+18 months 58.2% 44.50c 2.5% 3.8% 5.0% 6.1% 7.2%
Notes
1. The central case assumes that claims experience precisely matches the
medical assessment of the policy lives insured. The changes as shown illustrate
the effect of actual life expectancies varying from the medically assessed life
expectancies by the stated number of months.
2. This shows the percentage of policy lives insured assumed to survive
throughout the life of the Fund.
3. This shows the assumed average realisation values per US$1 of TLI policy
face value in respect of the policies of the surviving policy lives insured at
the end of life of the Fund, by reference to the different mortality
assumptions as stated. The central case corresponds to the market value
assumptions used in arriving at the end-August NAV.
Principal Assumptions
1. The illustrative returns have been prepared by reference to the actual
investments made by the Fund as at 31 August and on the assumption that the
remainder of the TLI portfolio will comprise policies acquired at current
market prices, as advised by Surrenda-link.
2. The balance of the TLI portfolio will be acquired by end January 2006.
3. At the time of full investment, the Company will have gearing (in the form
of bank borrowings pursuant to the existing committed facility) equivalent to
20% of the net assets of the Fund.
4. The Fund will in all other respects be managed in accordance with its
existing investment objective and investment policy and on the basis of the
assumptions as described in the prospectus of the Company dated 16 March 2004.
Source: Surrenda-link Limited
These projections must be understood to be indicative only. The uncertainties
both as to life expectancy and the eventual realisation value of policies still
in portfolio at the end of life of the Fundare considerable. It should be noted
that the basis for the "central case" realisation value corresponds to current
market prices as advised by Surrenda-link, taking account of the anticipated
life expectancy on the planned winding up date of the Fund.
When the original prospectus was drawn up, it was assumed that most policies
would be purchased without the benefit of a medical assessment of life
expectancy. In practice, the vast majority of policies have been purchased with
the benefit of two such assessments. The medically assessed life expectancy
figures should be a more reliable basis for projection than the published basic
valuation tables, as previously utilised as the sole reference point for the
illustrative return data, but the Board is keen for shareholders to see a range
of sensitivities with respect to potential returns. In this regard, it should
also be noted that, whilst there may be some variation with respect to
individual policies, the current average medically assessed life expectancy is
approximately equal to that shown by the basic valuation tables. This acts as a
useful check against potential over-reliance on medical assessments.
The Board proposes to publish updates to the table of illustrative returns by
way of market announcement on a quarterly basis, with reference to the actual
portfolio composition, adjusted for any policy maturities, and prevailing
market conditions at the time. A full update will be provided to shareholders
at the time of publication of the interim results of the Company for the
6-month period to 31 December 2005.
Sub-Custodian
Surrenda-link has been providing regular reports to the Board on the
administrative service requirements of the Fund and, in particular, the
arrangements with the Company's Sub-Custodian. On advice received from
Surrenda-link, Wells Fargo Bank Northwest, NA is in the process of being
appointed as the new Sub-Custodian of the Fund and the Board anticipates
improved service from this new arrangement together with a significant
reduction in costs.
Outlook
The Board looks forward to completion of the balance of the TLI portfolio
during the remainder of this year. We believe that the patient approach adopted
in completing the investment programme has been justified and, based on the
illustrative projections set out above, the Fund remains on target to deliver
shareholders with an attractive rate of return from an asset class largely
uncorrelated to the performance of the broader equity and bond markets.
Charles Tracy
Chairman
13 October 2005
Audited Statement of Total Return
for the period from incorporation, 27 February 2004, to 30 June 2005
27.02.04 to
30.06.05
Revenue Capital Total
� � �
Net gains on investments - 436,086 436,086
Other capital gains on currency - 45,337 45,337
movements
Income 1,704,186 - 1,704,186
Management fee (449,877) - (449,877)
Investment manager's fee (249,315) - (249,315)
Custodian fee (27,651) - (27,651)
Other expenses (407,042) - (407,042)
Net return on ordinary activities 570,301 481,423 1,051,724
before finance costs
Interest payable (1,601) - (1,601)
Total return on ordinary 568,700 481,423 1,050,123
activities for the financial
period
Return per redeemable share 1.42p 1.20p 2.62p
All revenue and capital items in the above statement derive from continuing
operations.
Audited Balance Sheet
At 30 June 2005
30.06.05
� �
Portfolio of Investments 16,541,068
Current Assets
Debtors 72,247
Cash on fixed deposit 17,520,230
Cash at bank 6,582,934
24,175,411
Creditors: amounts due within one year
Creditors 338,795
Unrealised loss on forward foreign exchange 159,325
contract
498,120
Net Current Assets 23,677,291
Net Assets 40,218,359
Capital and Reserves
Called up share capital -
Share premium account 39,168,236
Other reserves
Capital reserve - realised 633,580
Capital reserve - unrealised (152,157)
Revenue reserve 568,700
Total Equity Shareholders' Funds 40,218,359
Net asset value per share 100.5p
Audited Cash Flow Statement
for the period from incorporation, 27 February 2004, to 30 June 2005
27.02.04 to
30.06.05
�
Operating activities
Net revenue 568,700
Increase in debtors (72,247)
Increase in creditors 271,514
Net cash inflow from operating activities 767,967
Financing activities
Issue of shares 40,000,000
Issue costs paid (831,764)
Exchange movements 204,662
Net cash inflow from financing activities 39,372,898
Investing activities
Purchases of investments (17,323,053)
Proceeds from sales/disposals of 1,285,352
investments
Net cash outflow from investing activities (16,037,701)
Net cash inflow before use of liquid 24,103,164
resources
Management of liquid resources
Net cash placed on short term deposit (17,520,230)
Increase in cash in the period 6,582,934
Reconciliation of net cash flow to movement
in net funds
Increase in cash in the period 6,582,934
Net cash outflow from management of liquid 17,520,230
resources
Increase in net funds in the period 24,103,164
Opening net funds -
Closing net funds 24,103,164
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