ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Preliminary Announcement of Results
For the year ended 30 June 2007
At a meeting of the Board of Directors held on 12 October 2007, the
final accounts for the Company for the year ended 30 June 2007 were approved,
details of which are attached.
The financial information set out in this announcement does not
constitute the Company's statutory accounts for the year ended 30 June 2007,
but is derived from those accounts. Statutory accounts for the year ended 30
June 2007 will be delivered to Shareholders during October 2007. The auditors
have reported on the accounts and their report was unqualified. The audit
report draws attention to the inherent uncertainty in the valuation of the
Company's Traded Life Interests.
The financial statements have been prepared in accordance with
United Kingdom accounting standards. Whilst the financial information included
in this preliminary announcement has been computed in accordance with United
Kingdom accounting standards, this announcement does not itself contain
sufficient information to comply with United Kingdom accounting standards. The
Company will publish full financial statements that comply with United Kingdom
accounting standards in October 2007. This announcement has been prepared
using accounting policies consistent with those set out in the Company's
annual report and financial statements for the year ended 30 June 2006.
The Annual General Meeting of the Company will be held on 30
November 2007.
Company Secretary
Kleinwort Benson (Channel Islands) Corporate Services Limited
Telephone number: 01481 727111
Fax number: 01481 728317
12 October 2007
Dorey Court
Admiral Park
St Peter Port
Guernsey
GY1 3BG
CHAIRMAN'S STATEMENT
For the year ended 30 June 2007
At this stage in the Company's development, little portfolio
activity is expected. One new policy was acquired early in the year as a
result of bids placed prior to 30 June 2006; no policy acquisitions were made
in the second half of the year, and no further acquisitions are expected. Four
policies with a face value of US$ 5.1 million matured during the period and no
further maturities have been recorded since 30 June.
The portfolio as at 30 June 2007 consisted of 153 policies, with
exposure to 129 lives and a face value of US$ 248 million. The Investment
Manager's review and the accounts give further details of the portfolio.
Valuation
A statement was issued by the Company on 27 July 2007 relating to a
change in the valuation methodology with effect from 30 June 2007. Copies of
the full statement are available from the Company Secretary on request.
In brief, the board has conducted a review of the methodology and
concluded that the original approach did not allow adequately for the `select'
nature of the portfolio, i.e. the likelihood that compared to a random sample
of the general population fewer policies in the Company's portfolio would
mature in the earlier years, more policies would mature at, or close to, the
predicted life expectancy and fewer in later years. The new approach allows
for this by introducing a 24-month `select period' adjustment, which assumes
that policies experience only 5% of the standard Valuation Basic Table ("VBT")
mortality in the first 12 months after acquisition, 50% of the standard
mortality in the following 12 months and normal mortality thereafter. The VBT
mortality applied is then adjusted for each policy to ensure that overall life
expectancy matches the medically assessed expectancy for that policy. In
addition, the assumed Internal Rates of Return on policies are now based on
the US$ swap curve plus an appropriate risk premium, as advised by the
Investment Manager.
The result of this new approach is that the Net Asset Value ("NAV")
per share as at 30 June 2007 is calculated as 117.8 pence compared to 96.3
pence on the old basis (equivalent to an NAV per share uplift of 22.3%). It
must be cautioned that this remains only a Directors' valuation and may not be
an accurate indication of the actual prices currently obtainable in the market
for all or part of the portfolio.
At the end of June, and based on the NAV at that date of 117.8
pence per share, the projected returns were:
Illustrative redemption yields (% per annum)
Mortality Proportion Exit Price Variation in exit price
Assumption Surviving
Note 1 Note 2 Note 3 -10c -5c 0c +5c +10c
- 18 months 38.5% 45.57c 10.0% 10.9% 11.7% 12.6% 13.4%
- 6 months 42.4% 45.8c 8.5% 9.5% 10.5% 11.5% 12.4%
Central 45.5% 45.98c 7.3% 8.5% 9.6% 10.6% 11.7%
+ 6 months 48.9% 46.17c 5.9% 7.2% 8.4% 9.6% 10.7%
+ 18 months 55.0% 46.50c 3.1% 4.7% 6.3% 7.7% 9.0%
Notes
1. The central case assumes that claims experience precisely
matches the valuation basis. 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 Company.
3. This shows the assumed average realisation values per US$1 of
TLI policy face value in respect of the policies of the surviving lives
insured at the end of life of the Company, by reference to the different
mortality assumptions as stated. The central case (Realisation Value = 45.98
cents per $1 of face value) corresponds to the valuation assumptions used in
arriving at the end-June NAV.
Principal Assumptions
1. The illustrative returns have been prepared by reference to the
actual investments made by the Fund as at 30 June 2007.
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 the end of June, the facility with the Company's bankers
remained at US$25 million, but this has been increased to US$30 million since
that date to reflect the fact that maturities are as yet not sufficiently
frequent to cover monthly premiums. At the same time the maturity of the
facility has been extended to March 2009. The adequacy of the facility will
continue to be kept under review; gearing remains well within facility
covenants.
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. A further
forward sale for US$15 million, maturing on 30 March 2012, has been entered
into since the period end to reflect the increased valuation of the portfolio.
Outlook
The Company's portfolio has always been targeted at policies from
highly-rated insurers (the original commitment was an AM Best rating of `A' or
above). In fact 89% of the portfolio by value is currently invested in
policies from insurers rated `A+' or better. The board will continue to assess
all factors relevant to the valuation of portfolios such as the Company's TLI
portfolio, but actual returns will, of course, depend on mortality experience.
CPG Tracy
Chairman
12 October 2007
INVESTMENT MANAGER'S REVIEW
For the year ended 30 June 2007
Market Overview
The U.S. life settlement (TLI) market has once again grown
dramatically over the past year. Policy submissions to Surrenda-link from July
2006 to June 2007 were almost double the levels experienced the previous year,
now averaging around 500 per week representing approximately $1,400m in face
value. These volumes were not entirely unexpected - the industry body Life
Insurance Settlement Association (LISA) estimated that the market grew to $12
billion last year.
Some of the large investment banks have become involved in the life
settlement business through acquisition. Consequently, there has been
significant growth in awareness of the existence of the secondary market in
Life Settlements. Policies generated through a number of large premium finance
programmes have also entered the market further boosting supply.
Although the increased supply of policies has served to soften
prices somewhat, demand has also increased notably. The source of the greater
appetite comes from large pension funds and other institutional investors
seeking diversification and alternative investment strategies, discovering the
potential for the life settlements market to fulfil their requirements.
In October 2006 the New York Attorney General Eliot Spitzer filed a
lawsuit against one of the industry leaders, Coventry First. The suit alleges
anti-trust violations against Coventry and cites many items of evidence
demonstrating illegal payments to brokers and agents alike.
Whilst the life settlement market's image may have been temporarily
tarnished, this action demonstrated that questionable practices would not be
tolerated, spurring regulatory developments. This will no doubt lead to
greater protection for policy sellers and increased transparency across the
board.
The entry of the large investment banks to the market has not only
contributed to the surge in policies for sale but should also encourage
greater regulation. These banks are highly regulated by the Securities and
Exchange Commission, motivating the life settlement industry into following
suit.
On the regulatory front, various amendments to the National
Association of Insurance Commissioners (NAIC) Model Act on Life Settlements
have been proposed, and we continue to monitor these and their possible impact
on the Fund. So far the main thrust of these changes has been at stemming the
growth of so-called Stranger-Originated policies (i.e. those where the policy
is set up at the instigation of the eventual buyer). We do not currently
expect any significant impacts as regards the Fund from these proposals which
have, in any case, not been widely adopted.
Portfolio Review
The total number of TLIs held in the fund at the end of June 2007
was 153, with exposure to 129 unique lives, compared with 157, with exposure
to 132 unique lives at the end of June 2006. There have been a total of four
maturities, including the maturity in September 2006 referred to in our
previous report, involving three unique lives (one female, two male).
The four maturing policies had a face value of $5.1m, making total
maturity proceeds received to date $9.3m. These early maturities all benefit
the Fund, but overall results will also depend on the incidence of late
maturities and policies still in the portfolio at the Fund's final redemption
date.
Portfolio Summary Statistics at July 2007
AAO Portfolio Summary Statistics at end July 2007
Face Value: $248m
Male/Female Ratio: 65%/35%
Average Age at Purchase: 82.5 years
Average Life Expectancy at 7.5 years
Purchase:
Total Number of Life Companies: 41
Life Group Distribution (Top Group Holding A.M. Best
5): Lincoln* 15.0% A+
AIG Life 14.5% A++
Face Weighted Manulife 12.9% A++
AEGON USA 11.5% A+
MassMutual 8.7% A++
Credit Quality Distribution: A.M. Best Holding
A++ 40.5%
Face Weighted A+ 46.4%
A 12.4%
A- 0.7%
*Lincoln National merged with Jefferson-Pilot. The merged company now operates
under the brand name Lincoln Financial Group.
Premium Payments
Surrenda-link continues the review of all policy statements (annual
or otherwise) to guarantee that any scope for further optimisation of the
premium payment schedule is identified, in order to maximise financial return
by minimising payments required to keep policies in force. The sub-custodian,
Wells Fargo, remains dedicated to ensuring that due premiums are paid in a
timely manner to the life insurance company. The single largest draw on the
fund's liquidity continues to be the ongoing premium obligations which are
continually monitored. The expected premium outlay over the 12 months to June
2008 totals approximately $9.3m.
Outlook
Surrenda-link has not been actively purchasing for the Fund over the past
year. The overall management of the portfolio has therefore focused on the
detection of any maturities occurring and upon such an event, claim
processing. Additionally, the payment and further optimisation of scheduled
premiums remains an ongoing task. The adoption of the 'select period' approach
in valuation is intended to reflect the fact that, in portfolios such as this,
few maturities occur in the early years. The rate of maturities is expected to
increase compared with prior years but the timing of maturities is likely to
be erratic, consistent with experience to date.
Surrenda-link Limited
12 October 2007
MANAGER'S REVIEW
For the year ended 30 June 2007
Cash management and borrowings
In the absence of a significant number of maturities, the Fund
continued to experience a demand for cash in order to fund the premium
payments on its policies. As a result, the Fund made further drawings on the
$25 million borrowing facility provided by its bankers, Allied Irish Banks.
The total drawn down rose to $22 million in January and $25 million in June.
As of 30 June 2007, the level of gearing was 26.4%. 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 death of policy-holders and, on the other, outgoing premium
payments for ongoing policies.
Subsequent to the year-end, in August, Allied Irish Banks agreed to
increase the facility to $30 million and at the same time to extend it to
March 2009. To date no further draw-downs have been made.
Currency hedging
The Fund's US dollar exposure, that is the net current value of
those assets 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 31 March 2009 and partly for 30 March 2012, the latter
being the winding-up date for the Fund. Because they cannot be identified or
quantified in advance, the anticipated profits arising from the maturity of
policies are not hedged.
While the above forward sales contracts establish a hedge to the
above dates, it does not mean that there is a perfect hedge for intermediate
periods. As the forward contracts move towards expiry, the spot rate and the
forward rate will gradually converge, but they will not do so in a smooth
progression, since the difference between the currency spot rate and the
forward rate will vary according to the difference between the applicable
interest rates for US dollars and sterling. The Fund marks to market its
forward positions, discounted to their net present value, so that at any
intermediate date there will almost certainly be an additional profit or loss
on the contracts that will eventually be reversed.
This additional, or excess, profit or loss will be reflected in the
ongoing calculations of the Fund's net asset value and in its financial
reporting. From time to time this balance may be material, but over the life
of the Fund it should largely disappear, such that the end result will be that
the Fund's current US dollar exposure will have been substantially hedged.
RCM (UK) Limited
12 October 2007
STATEMENT OF TOTAL RETURN
For the year ended 30 June 2007
Year ended 30 June 2007 Year ended 30 June 2006
Revenue Capital Total Revenue Capital Total
� � � � � �
Net gains on investments - 3,267,606 3,267,606 - 1,274,437 1,274,437
Other capital gains
on currency movements - 1,675,344 1,675,344 - 2,767,288 2,767,288
Income 57,404 - 57,404 292,381 - 292,381
Management fee (263,778) - (263,778) (293,410) - (293,410)
Investment
manager's fee (214,554) - (214,554) (213,081) - (213,081)
Custodian fee (18,803) - (18,803) (19,423) - (19,423)
Other expenses (270,607) - (270,607) (343,787) - (343,787)
Net return on ordinary activities
before finance costs (710,338) 4,942,950 4,232,612 (577,320) 4,041,725 3,464,405
Interest payable (608,857) - (608,857) (178,775) - (178,775)
Total return on ordinary
activities for the
financial year (1,319,195) 4,942,950 3,623,755 (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
Balance
carried forward (1,506,590) 9,466,098 7,959,508 (187,395) 4,523,148 4,335,753
Return per
redeemable share (3.30p) 12.36p 9.06p (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
For the year ended 30 June 2007
30 June 2007 30 June 2006
� � � �
Assets
Investments 53,903,411 49,439,126
Debtors 1,087,754 461,567
Cash on fixed deposit 1,494,251 1,619,232
Cash at bank 429,343 758,358
Unrealised profit on forward foreign
exchange contract 2,910,855 1,984,764
59,825,614 54,263,047
Liabilities (excluding net assets attributable to shareholders)
Creditors 252,629 209,393
Unrealised loss on forward foreign exchange contract - -
Loan account 12,445,241 10,549,665
12,697,870 10,759,058
Net assets attributable to redeemable
participating preference shareholders
Share premium account 39,168,236 39,168,236
Capital reserve 9,466,098 4,523,148
Revenue reserve (1,506,590) (187,395)
47,127,744 43,503,989
59,825,614 54,263,047
Net asset value per share 117.8p 108.8p
CASH FLOW STATEMENT
For the year ended 30 June 2007
Year ended Year ended
30 June 2007 30 June 2006
� � � �
Operating activities
Net deficit (1,319,195) (756,095)
Increase in debtors (626,187) (389,320)
Increase/(decrease) in creditors 43,236 (62,121)
Net cash outflow from operating activities (1,902,146) (1,207,536)
Financing activities
Issue of shares - -
Issue costs paid - -
Loan 1,895,576 10,549,665
Exchange movements 749,253 623,199
Net cash inflow from financing activities 2,644,829 11,172,864
Investing activities
Purchases of investments (4,831,210) (32,691,297)
Proceeds from maturity of
investments 3,634,531 1,000,395
Net cash outflow from
investing activities (1,196,679) (31,690,902)
Net cash outflow before use of liquid resources (453,996) (21,725,574)
Management of liquid resources
Net cash matured from short term deposit 124,981 15,900,998
Decrease in cash in the year (329,015) (5,824,576)
Reconciliation of net cash flow to movement in net funds
Decrease in cash in the period (329,015) (5,824,576)
Net cash inflow from management of liquid resources (124,981) (15,900,998)
Decrease in net funds in the year (453,996) (21,725,574)
Opening net funds 2,377,590 24,103,164
Closing net funds 1,923,594 2,377,590
END
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