ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
ANNOUNCEMENT OF RESULTS
For the period from 1 July 2006 to 31 December 2006
CHAIRMAN'S STATEMENT
For the period from 1 July 2006 to 31 December 2006
In my previous statement I indicated that little portfolio activity
would be seen over the next few months, and this has indeed been the case. In
the last six months only 2 policies have matured, with total maturity proceeds
of US$ 0.8 million. One new policy was acquired in the period as a result of
bids placed prior to 30th June; no further policies acquisitions are pending.
Two further policies, on a single insured life, have matured since 31st
December, with a face value of US$ 2.2 million.
The portfolio as at 31 December thus consisted of 156 policies,
with exposure to 130 separate lives and a face value of US$ 252 million. The
Investment Manager's review and the accounts give further details of the
portfolio.
Valuation
As previously explained, the published NAV of the Company relies on
a market-related valuation method, which in turn uses standard actuarial
tables to assess the likely pattern of mortality across the portfolio. It is
quite possible that portfolios such as that acquired by the Company, with the
benefit of medically assessed life expectancies, will tend to have fewer
mortalities in the early years than the assumed standard. This should,
however, be compensated by a greater concentration of maturities around the
assessed life expectancy dates. If this is the case, the valuation of the
Company's portfolio may well prove to be conservative. The board, in
conjunction with the Investment Manager, will continue to keep the valuation
methodology under review with reference to the composition of the portfolio
and the developments in the secondary market generally.
As at the end of December, and based on the NAV at that date of
101.82 pence per share, the projected returns were:
Illustrative redemption yields (% per annum)
Exit
Mortality Proportion Price
Assumption Surviving
Note 1 Note 2 Note 3 -10c -5c 0c +5c +10c
+ 18
months 45.9% 40.46c 8.7% 9.8% 10.9% 11.9% 12.9%
+ 6 months 49.8% 40.56c 6.9% 8.2% 9.4% 10.6% 11.7%
0 52.9% 40.64c 5.4% 6.9% 8.2% 9.5% 10.7%
- 6 months 56.2% 40.72c 3.6% 5.3% 6.8% 8.3% 9.6%
- 18
months 62.0% 40.85c 0.0% 2.1% 4.0% 5.8% 7.4%
Notes
1. This assumes that deaths occur as predicted by the medical
assessors
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 value 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. The base case (Realisation Value =
40.64 cents per $1 of face value) corresponds to the market value assumptions
used in arriving at the end-August NAV, assuming medically adjusted life
expectancies as at that date.
Principal Assumptions
1. The illustrative returns have been prepared by reference to the
actual investments made by the Fund as at 31 December.
2. The Fund will in all other respects be managed in accordance
with its existing investment objective and investment policy.
Source: Surrenda-link Limited
Gearing
As at 31 December the original facility of US$20 million was fully
drawn and the Company's bankers had agreed to increase the facility to US$25
million. Gearing remains within the facility covenants. The scale of gearing
will continue to depend on the balance between monthly premiums payable
(currently around US$750,000 per month) and the receipt of policy maturity
proceeds. The adequacy of the facility will be kept under review.
Foreign Exchange
There has been no change in the Company's policy as regards
currency hedging, which is to hedge the present value of the US Dollar
portfolio, but not to hedge future gains in portfolio value now. Details of
forward currency positions are set out in the accounts.
Outlook
The portfolio now established has the characteristics of quality,
in terms of financial strength and spread of investment, that the Company
originally set out to achieve. It is thus likely that the next six months will
continue to see little portfolio activity.
Charles Tracy
Chairman
16 March 2007
INVESTMENT MANAGER'S REVIEW
For the period from 1 July 2006 to 31 December 2006
Market Overview
During the second half of 2006 the market continued to grow both in
policy volume and overall trading values suggesting increased investor
appetite and positive opinions on the markets potential.
Surrenda-link (`SL') continued to see strong enquiry volumes and
improved bid success and a modest rise in market IRRs for our actively
investing funds. SL has continued to see strong evidence of mature portfolios
being offered in the open market at a premium to purchase cost and holding
valuations, providing additional confirmation to the value attributed to the
Fund's underlying assets.
The regulation of U.S Life Settlements at State and Federal level
continued to be a hot topic through 2006 and this trend is anticipated to
continue in 2007. As already publicly stated, Surrenda-link and the Fund's
Directors are committed to the highest standards of best practice, regulatory
compliance and transparency and therefore welcome appropriate regulation to
encourage a well managed and sustainable market across the entire United
States.
Portfolio Review
The portfolio as now constituted meets all the main criteria put
forward in the Prospectus. The fund completed the construction of its
portfolio in July 2006 and no further bids have been made since that date. As
at 31 December 2006, the fund had 156 policies on 130 separate lives, compared
with an initial target of over 130 policies on over 100 lives. A total of 4
policies had matured at the interim reporting date with a further mortality
recorded in January 2007. The fund held 2 policies on this individual with a
combined face value of $2.2m and an approximate valuation of $980k.
The Fund's policies were issued from 44 separate Life Offices. No
issuing Life Office has an AM Best rating below A-, and the distribution by
Life Office rating is:
Rating Number % Investment
Value
A++ 10 48%
A+ 25 43%
A 8 8%
A- 1 1%
Total 44 100%
Since the last reporting date, AM Best has concluded its review of
those life insurance companies previously noted as Au (under review). Ratings
of A have now been issued on both companies.
Approximately 66% of the lives assured are males and the average
age of all lives assured at purchase is 82.5 years against a target of around
85 years. As such the average life expectancy (LE) of the portfolio is
slightly longer than originally envisaged. However, the LEs used in pricing
are on average closer with widely used US mortality table LEs, which suggests
that the pricing is not overly dependent on the medical assessments.
Only one policy is a joint life policy. This is noteworthy as there
are many joint life policies available in the market. There is nothing wrong
with joint life policies per se, but there are a large number of market
participants who use pricing methodologies for joint life cases which we
believe to be unsound and as a result we are not often competitive on these
policies.
In November 2006 the Fund agreed an increased loan facility to
$25m. The remaining un-drawn facility will continue to be used to pay premiums
until they can be fully funded from maturities.
The current pattern of irregular deaths being experienced by the
Fund is consistent with our experience of portfolios of similar vintage and
portfolio constitution. We continue to be optimistic that further maturities
will deliver the necessary capital appreciation during this post investment
phase.
Surrenda-link Limited
16 March 2007
MANAGER'S REVIEW
For the period from 1 July 2006 to 31 December 2006
Cash management and borrowings
During the six month period, the Fund continued to experience a net
demand for funds in the absence of a significant number of policy maturities.
As a result, the Fund drew down the remaining US$500,000 available to it under
the US dollar borrowing facility provided by its bankers, Allied Irish Banks
plc, and in November we negotiated an increase in this facility from US$20
million to US$25 million. As of 31st December none of this further facility
had been drawn down, so the amount of borrowing under this facility stood at
US$20 million.
On that basis, the level of gearing as at 31st December was 25.0%.
The maximum level of gearing to be reached cannot be predicted precisely
because the outturn will depend upon the balance between, on the one hand,
receipts arising from the deaths of policy-holders and, on the other, outgoing
premium payments for ongoing policies.
Currency hedging
The Fund's US dollar exposure, that is the net current value of
those assets and liabilities that are denominated in US dollars, is hedged
back into sterling. This has been implemented by means of forward sales of US
dollars into sterling partly for 31st March 2009 and partly for 30th March
2012, the latter being the winding-up date for the Fund.
The above forward sales contracts mean that the Fund's US dollar
exposure is hedged partly to 31st March 2009 and partly to 30th March 2012.
However, it does not mean that there is necessarily a perfect hedge for
intermediate periods. The difference between the currency spot rate and the
forward rate reflects the difference between the applicable interest rates (or
more strictly swap rates) for US dollars and sterling. As the forward
contracts move towards expiry, the spot rate and the forward rate will
gradually converge. However, they will not do so in a smooth progression, and
since the Fund marks its forward positions to market, there will almost
certainly be an additional, unrealised profit or loss on the contracts during
intermediate periods.
This intermediate, unrealised profit or loss is reflected in the
ongoing calculations of the Fund's net asset value and in its financial
reporting. From time to time this may be material, and as at 31st December
2006 there was an unrealised loss of 1.4 pence per share. This compares with
an unrealised profit as at 30th June 2006 of 2.9 pence per share. The net
change of 4.3 pence per share is a material factor in the decline in the
Fund's net asset value from 108.4 pence per share to 101.8 pence per share
over the six months to 31st December 2006. Because of the way in which the
accounts are presented, these numbers are not separately itemised therein.
RCM (UK) Limited
16 March 2007
STATEMENT OF TOTAL RETURN
For the period from 1 July 2006 to 31 December 2006
01.07.06 to 31.12.06 01.07.05 to 31.12.05 01.07.05 to 30.06.06
Revenue Capital Total Revenue Capital Total Revenue Capital Total
� � � � � � � � �
Net (losses)/gains on - (3,318,370) (3,318,370) - 3,770,775 3,770,775 - 1,274,437 1,274,437
investments
Other capital
gains/(losses) - 1,127,347 1,127,347 - (3,396) (3,396) - 2,767,288 2,767,288
on currency movements
Income 34,249 - 34,249 215,825 - 215,825 292,381 - 292,381
Management fee (102,369) - (102,369) (156,236) - (156,236) (293,410) - (293,410)
Investment
manager's fee (95,479) - (95,479) (99,862) - (99,862) (213,081) - (213,081)
Custodian fee (8,640) - (8,640) (8,723) - (8,723) (19,423) - (19,423)
Other expenses (139,789) - (139,789) (179,502) - (179,502) (343,787) - (343,787)
Net (loss)/return on ordinary
activities before
finance costs (312,028) (2,191,023) (2,503,051) (228,498) 3,767,379 3,538,881 (577,320) 4,041,725 3,464,405
Interest payable (270,983) - (270,983) (218) - (218) (178,775) - (178,775)
Total (loss)/return on
ordinary activities for
the financial period (583,011) (2,191,023) (2,774,034) (228,716) 3,767,379 3,538,663 (756,095) 4,041,725 3,285,630
Balance brought
forward (187,395) 4,523,148 4,335,753 568,700 481,423 1,050,123 568,700 481,423 1,050,123
Balance carried
forward (770,406) 2,332,125 1,561,719 339,984 4,248,802 4,588,786 (187,395) 4,523,148 4,335,753
Return per
redeemable share (1.46p) (5.48p) (6.94p) (0.57p) 9.42p 8.85p (1.89p) 10.10p 8.21p
The revenue column of this statement is the revenue account of the Company.
All revenue and capital items in the above statement derive from continuing operations.
BALANCE SHEET
At 31 December 2006
31.12.06 31.12.05 30.06.06
� � �
Assets
Investments 47,261,039 33,391,304 49,439,126
Debtors 299,711 9,152 461,567
Unrealised gain on forward foreign
exchange contract 2,547,150 - 1,984,764
Cash on fixed deposit - 3,035,241 1,619,232
Cash at bank 1,007,808 8,181,902 758,358
Total Assets 51,115,708 44,617,599 54,263,047
Current Liabilities
Creditors 175,941 209,782 209,393
Unrealised loss on forward foreign
exchange contract - 650,795 -
Loan account 10,209,812 - 10,549,665
10,385,753 860,577 10,759,058
Capital and reserves
Share premium account 39,168,236 39,168,236 39,168,236
Capital reserve 2,332,125 4,248,802 4,523,148
Revenue reserve (770,406) 339,984 (187,395)
Equity Shareholders funds 40,729,955 43,757,022 43,503,989
Total Equity and Liabilities 51,115,708 44,617,599 54,263,047
Net asset value per share 101.82p 109.39p 108.76p
The net asset value as at 31 December 2006, released to the London
Stock Exchange on 26 January 2007, of 102.1p per share, differs from that
disclosed in these financial statements as a result of an error in the
treatment of accruals which was identified in the routine six-monthly review
of the accounts.
CASH FLOW STATEMENT
For the period from 1 July 2006 to 31 December 2006
01.07.06 01.07.05 01.07.05
to 31.12.06 to 31.12.05 to 30.06.06
� � �
Operating activities
Net revenue/(deficit) (583,011) (228,716) (756,095)
Decrease/(increase) in debtors 161,856 63,095 (389,320)
Increase/(decrease) in creditors (33,452) (129,013) (62,121)
Net cash inflow/(outflow) from operating activities (454,607) (294,634) (1,207,536)
Financing activities
Issue of shares - - -
Issue costs paid - - -
Loan (339,853) - 10,549,665
Exchange movements 564,961 488,074 623,199
Net cash inflow from financing activities 225,108 488,074 11,172,864
Investing activities
Purchases of investments (2,417,368) (13,779,858) (32,691,297)
Proceeds from maturity of investments 1,277,085 700,397 1,000,395
Net cash inflow/(outflow) from investing activities (1,140,283) (13,079,461) (31,690,902)
Net cash inflow/(outflow) before use of liquid resources (1,369,782) (12,886,021) (21,725,574)
Management of liquid resources
Net cash matured from short term deposit 1,619,232 14,484,989 15,900,998
Increase/(decrease) in cash in the period 249,450 1,598,968 (5,824,576)
Reconciliation of net cash flow to movement in net funds
Increase/(decrease) in cash in the period 249,450 1,598,968 (5,824,576)
Net cash (inflow)/outflow from management
of liquid resources (1,619,232) (14,484,989) (15,900,998)
Increase/(decrease) in net funds in the period (1,369,782) (12,886,021) (21,725,574)
Opening net funds 2,377,590 24,103,164 24,103,164
Closing net funds 1,007,808 11,217,143 2,377,590
END
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