ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Preliminary Announcement of Results
For the period 1 July 2007 to 31 December 2007
At a meeting of the Board of Directors held on 21 February 2008,
the half yearly accounts for the Company for the period 1 July 2007 to 31
December 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 period 1 July 2007 to 31
December 2007, but is derived from those accounts. Statutory accounts for the
period 1 July 2007 to 31 December 2007 will be delivered to Shareholders
during February 2008.
The financial statements have been prepared in accordance with
International Financial Reporting Standards (IFRS). Whilst the financial
information included in this preliminary announcement has been computed in
accordance with IFRS, this announcement does not itself contain sufficient
information to comply with IFRS. The Company will publish condensed financial
statements that comply with IFRS in February 2008. This announcement has been
prepared using accounting policies consistent with those set out in the
Company's half yearly report and financial statements for the period 1 July
2007 to 31 December 2007.
Company Secretary
Kleinwort Benson (Channel Islands) Corporate Services Limited
Telephone number: 01481 727111
Fax number: 01481 728317
25 February 2008
Dorey Court
Admiral Park
St Peter Port
Guernsey
GY1 3BG
CHAIRMAN'S STATEMENT
For the period 1 July 2007 to 31 December 2007
This has been a quiet period, with no portfolio acquisitions and
only 2 maturities within the portfolio since 30 June 2007 involving policies
with a face value of US$2.4m. The portfolio thus consisted as at 31 December
2007 of 152 policies on 128 separate lives, with a face value of US$248
million. The Investment Manager's review and the accounts give further details
of the portfolio.
Valuation
In my last report I referred to a change in the method of
valuation, which reflected the fact that the Company's portfolio is different
from a random portfolio of lives insured. This is now provided for by using a
24-month `select period' adjustment. Given that the period since most policies
were originally acquired is now over 24 months, the number of maturities
should now be beginning to increase significantly. Although this has not been
the case in the reporting period, subsequent to the period end there have been
a total of 4 policy maturities with a total face value of US$3 million,
involving two separate lives.
Your Board will continue to monitor closely with the Investment
Manager the rate of actual maturities compared with the mortality assumptions
included in the valuation basis. As part of this process, the Board is
proposing to commission a number of new life expectancy assessments to test
the assumed expectancies used for the valuation.
On the basis of the current valuation methodology, at the end of
December, and based on the NAV of 116.18 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 40.8% 45.90c 11.0% 12.1% 13.2% 14.3% 15.3%
- 6 months 44.7% 46.14c 9.2% 10.5% 11.8% 13.0% 14.2%
0 47.8% 46.33c 7.8% 9.2% 10.6% 11.9% 13.2%
+ 6 months 51.1% 46.54c 6.1% 7.7% 9.3% 10.7% 12.1%
+ 18 months 57.1% 46.89c 2.8% 4.8% 6.6% 8.4% 10.1%
Notes
1. This assumes that deaths occur as predicted by the medical
assessors plus or minus the periods listed.
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. The base case (Realisation Value =
46.33 cents per $1 of face value) corresponds to the market value assumptions
used in arriving at the end-December NAV.
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
In August the facility available to the Company was increased from
US$25 million to US$30 million and was extended to March 2009. Drawings
continue to reflect the balance between monthly outgoings and policy
maturities. 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; there have
been no further forward sales since my last report.
Outlook
The percentage of the portfolio invested in policies from insurers
rated A+ or better by AM Best is currently at 95%. The board will continue to
monitor factors relevant to the valuation of the Company's TLI portfolio, but
actual returns will continue to depend principally on mortality experience.
CPG Tracy
Chairman
21 February 2008
INVESTMENT MANAGER'S REVIEW
For the period 1 July 2007 to 31 December 2007
Portfolio Review
No further offers have been placed on behalf of the Fund since the
completion of the portfolio in July 2006. As at 31 December 2007, the Fund had
152 policies on 128 separate lives, with a total face amount of $248m. This
compares with the initial target of over 130 policies on over 100 lives. As at
31 December 2007 a total of 8 policies on 7 individual lives had matured.
Since the period end notification of a further 2 mortalities representing 4
policies have been recorded representing a face value of US$3 million.
The Fund's policies were issued from 41 separate Life Offices. No
issuing Life Office has an AM Best rating below A-, and the current
distribution by Life Office rating is:
Rating Number % Investment
Value
A++ 10 40.8%
A+ 24 54.6%
A 6 3.9%
A- 1 0.7%
Total 41 100%
Approximately 64% of the remaining policies in portfolio were
issued on male lives.
In August 2007 the Fund agreed an increased loan facility with its
bankers of $30 million. At the same time the facility was extended for a
further twelve months to run until March 2009. The undrawn balance on this
facility will be used to fund premium payments until they can be fully funded
from maturities.
As anticipated, maturities remain irregular in this early stage of
the Fund's post-investment life and this is expected to continue.
Market Review
The Life Settlement market continued to grow in terms of size and
sophistication during the latter half of 2007. The significant growth in
awareness of the existence of the secondary market for Life Settlements is
continuing to stimulate the rapid market expansion coupled with increased
investor interest from around the globe.
Policy volumes seen by the Investment Manager remained high, only
pausing for breath in the month of November when a large fall in enquiry
levels was experienced. This was mainly due to Surrenda-link trimming its
supplier network to exclude those that were underperforming. The main effect
was a reduction in duplicate policy submissions received. The holiday period
also contributed to the reduced flow; as the year drew to a close, suppliers
switched their attention to the closing process to hit year-end targets.
The regulation of US Life Settlements continued to receive a
substantial amount of attention, and is expected to continue to attract such
interest into the foreseeable future. A proposed new model act released by
NCOIL (National Conference of Insurance Legislators) in November won support
from both the life settlement and life insurance industries. The proposal will
compete for adoption by state legislatures in 2008 with alternative
legislation drafted by the NAIC (National Association of Insurance
Commissioners).
Surrenda-link Limited
21 February 2008
MANAGER'S REVIEW
For the period 1 July 2007 to 31 December 2007
Cash management and borrowings
In view of the limited amount of cash received as a result of
maturities during the six month period, the Fund experienced continued demand
for cash in order to fund the premium payments on its policies. These were
funded out of existing resources, and the amount of US dollar borrowing
remained at $25 million throughout the period.
However, in anticipation of future cash flow needs, in August
Allied Irish Banks agreed to increase the facility from $25 million to $30
million and at the same time to extend it to March 2009. Part of this increase
was subsequently used to borrow sterling in order to cover expenses
denominated in sterling. As of end-December, the Fund had borrowed �300,000 in
addition to the US dollar borrowings referred to above.
As of 31 December 2007, the level of gearing was 27.7%. The maximum
level of gearing to be reached cannot be predicted precisely because the out
turn 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.
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 the maturity of policies
cannot be quantified in advance, anticipated US dollar profits are not sold
forward.
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
21 February 2008
INCOME STATEMENT
For the period 1 July 2007 to 31 December 2007
01.07.07 to 31.12.07 01.07.06 to 31.12.06 01.07.06 to 30.06.07
Reve- Capi- Total Reve- Capi- Total Reve- Capi- Total
nue tal nue tal nue tal
� � � � � � � � �
Net gains/(losses) - 1,258,705 1,258,705 - (3,318,370) (3,318,370) - 3,267,606 3,267,606
on
investments
Other capital - (931,623) (931,623) - 1,127,347 1,127,347 - 1,675,344 1,675,344
(losses)/gains
on currency
movements
Income 25,944 - 25,944 34,249 - 34,249 57,404 - 57,404
Management fee (255,066) - (255,066) (102,369) - (102,369) (263,778) - (263,778)
Investment (171,595) - (171,595) (95,479) - (95,479) (214,554) - (214,554)
manager's
fee
Custodian fee (13,481) - (13,481) (8,640) - (8,640) (18,803) - (18,803)
Other expenses (170,107) - (170,107) (139,789) - (139,789) (270,607) - (270,607)
Net return on
ordinary
activities
before finance (584,305) 327,082 (257,223) (312,028) (2,191,023) (2,503,051) (710,338) 4,942,950 4,232,612
costs
Interest
payable (396,543) - (396,543) (270,983) - (270,983) (608,857) - (608,857)
Total return on
ordinary
activities
for the (980,848) 327,082 (653,766) (583,011) (2,191,023) (2,774,034) (1,319,195) 4,942,950 3,623,755
financial
period
Balance (1,506,590) 9,466,098 7,959,508 (187,395) 4,523,148 4,335,753 (187,395) 4,523,148 4,335,753
brought
forward
Balance (2,487,438) 9,793,180 7,305,742 (770,406) 2,332,125 1,561,719 (1,506,590) 9,466,098 7,959,508
carried
forward
Basic and (2.45p) 0.82p (1.63p) (1.46p) (5.48p) (6.94p) (3.30p) 12.36p 9.06p
diluted
return per
redeemable
participating
preference
share
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.
STATEMENT OF CHANGES IN REDEEMABLE SHAREHOLDERS' EQUITY
For the period 1 July 2007 to 31 December 2007
Share Share Capital Capital Revenue Total
Capital Premium Reserve Reserve Reserve
Realised Unrealised
� � � � � �
At 1 July 2006 - 39,168,236 1,252,676 3,270,472 (187,395) 43,503,989
Realised gain on maturities - - 608,313 - - 608,313
Unrealised loss on investments - - - (3,926,683) - (3,926,683)
Unrealised currency gain on forward
foreign currency contracts - - - 562,386 - 562,386
Unrealised currency gains - - - 564,961 - 564,961
Revenue loss for the period - - - - (583,011) (583,011)
At 31 December 2006 - 39,168,236 1,860,989 471,136 (770,406) 40,729,955
Realised gain on maturities - - 960,022 - - 960,022
Unrealised gain on investments - - - 5,625,954 - 5,625,954
Unrealised currency gain on forward
foreign currency contracts - - - 363,705 - 363,705
Unrealised currency gains - - - 184,292 - 184,292
Revenue loss for the period - - - - (736,184) (736,184)
At 30 June 2007 - 39,168,236 2,821,011 6,645,087 (1,506,590) 47,127,744
Realised gain on maturities - - 96,385 - - 96,385
Unrealised gain on investments - - - 1,162,320 - 1,162,320
Unrealised currency loss on forward
foreign currency contracts - - - (800,365) - (800,365)
Unrealised currency loss - - - (131,258) - (131,258)
Revenue loss for the period - - - - (980,848) (980,848)
At 31 December 2007 - 39,168,236 2,917,396 6,875,784 (2,487,438) 46,473,978
BALANCE SHEET
As at 31 December 2007
31.12.07 31.12.06 30.06.07
� � �
Assets
Investments 57,131,795 47,261,039 53,903,411
Debtors 147,492 299,711 1,087,754
Unrealised gain on 2,110,490 2,547,150 2,910,855
forward foreign
exchange contract
Cash on fixed deposit - - 1,494,251
Cash at bank 496,688 1,007,808 429,343
Total Assets 59,886,465 51,115,708 59,825,614
Current Liabilities
Creditors 517,711 175,941 252,629
Loan account 12,894,776 10,209,812 12,445,241
13,412,487 10,385,753 12,697,870
Capital and reserves
Share premium account 39,168,236 39,168,236 39,168,236
Capital reserve 9,793,180 2,332,125 9,466,098
Revenue reserve (2,487,438) (770,406) (1,506,590)
Equity Shareholders 46,473,978 40,729,955 47,127,744
funds
Total Equity and 59,886,465 51,115,708 59,825,614
Liabilities
Net asset value per 116.18p 101.82p 117.82p
redeemable participating
preference share
CASH FLOW STATEMENT
For the period 1 July 2007 to 31 December 2007
01.07.07 01.07.06 01.07.06
to 31.12.07 to 31.12.06 to 30.06.07
� � �
Operating activities
Net loss (980,848) (583,011) (1,319,195)
Decrease/(increase) in debtors 940,262 161,856 (626,187)
Increase/(decrease) in creditors 265,082 (33,452) 43,236
Net cash inflow/(outflow) 224,496 (454,607) (1,902,146)
from operating activities
Financing activities
Loan 449,535 (339,853) 1,895,576
Exchange movements (131,258) 564,961 749,253
Net cash inflow from 318,277 225,108 2,644,829
financing activities
Investing activities
Premiums paid (2,111,697) (2,417,368) (4,831,210)
Proceeds from maturity 142,018 1,277,085 3,634,531
of investments
Net cash outflow from (1,969,679) (1,140,283) (1,196,679)
investing activities
Decrease in net funds (1,426,906) (1,369,782) (453,996)
in the period
Opening net funds 1,923,594 2,377,590 2,377,590
Closing net funds 496,688 1,007,808 1,923,594
END
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