ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Annual Financial Report Announcement
For the year ended 30 June 2008
At a meeting of the Board of Directors held on 17 October 2008, the
final accounts for the Company for the year ended 30 June 2008 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 2008,
but is derived from those accounts. Statutory accounts for the year ended 30
June 2008 will be delivered to Shareholders during October 2008. 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
International Financial Reporting Standards. Whilst the financial information
included in this preliminary announcement has been computed in accordance with
International Financial Reporting Standards, this announcement does not itself
contain sufficient information to comply with International Financial
Reporting Standards. The Company will publish full financial statements that
comply with International Financial Reporting Standards in October 2008. 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 2008.
The Annual General Meeting of the Company will be held on 2
December 2008.
Company Secretary
Kleinwort Benson (Channel Islands) Fund Services Limited
Telephone number: 01481 727111
Fax number: 01481 728317
23 October 2008
Dorey Court
Admiral Park
St Peter Port
Guernsey
GY1 3BG
INVESTOR INFORMATION
General Information
Alternative Asset Opportunities PCC Limited (the "Company") was
registered on 27 February 2004 in Guernsey as a closed-ended protected cell
company in accordance with the provisions of The Protected Cell Companies
Ordinance, 1997 and The Companies (Guernsey) Law, 1994. It is established with
one Cell known as the US Traded Life Interests Fund (the "Fund") which has a
planned life of approximately 8 years from the date of the launch. The Fund's
redeemable participating preference shares (the `Shares') were admitted to the
Official List of the UK Listing Authority and commenced trading on the London
Stock Exchange on 25 March 2004. The Annual Report and Audited Financial
Statements cover the year ended 30 June 2008.
Investment Objective
The Company's objective in respect of the Fund is to provide
investors with an attractive capital return through investment predominantly
in a diversified portfolio of U.S. Traded Life Interests ("TLIs").
Investment policy and strategy
The Company has invested the assets of the Fund in a range of TLIs
on the lives of US citizens aged, at the time of acquisition, between 80 and
90 years. All TLIs acquired are Whole-Of-Life policies or Universal Life
policies.No viatical policies (that is, a policy on the life of an insured who
is terminally ill and with a life expectancy of less than 2 years) have been
acquired. The TLIs acquired are policies issued by a range of US life
insurance companies. Each underlying life insurance company has an A.M. Best
or a Standard & Poor's credit rating of at least "A" at the time of
acquisition of the relevant policy. A.M. Best is a US credit rating agency
which provides the most comprehensive coverage of the US life company sector.
Not more than 15 per cent. of the gross assets of the Fund, at the time of
purchase, have been invested in life policies issued by any single US life
insurance company or group. The Board has overall responsibility for
allocating the assets of the Fund in accordance with the investment objective
and policy. The Investment Manager is responsible, inter alia, for identifying
and monitoring, on behalf of the Board, TLIs that are consistent with the
Company's investment objective and policy.
The Company has the ability to incur borrowings to be applied in
meeting TLI acquisition costs, premium payments and other expenses. The
Company's borrowings as at 30 June 2008 were $28.2 million and �750,000.
It is intended that the proceeds of TLIs which mature are used,
after the deduction of expenses:
- first, to reduce borrowings under the Company's credit facility;
and
- secondly, to return capital to Shareholders, as determined by the
Board.
Pending the return of capital to Shareholders, the cash proceeds of
TLIs will be invested in a portfolio that may include US treasury bonds, UK
gilts and Sterling-denominated corporate bonds with a minimum rating of AA by
Standard & Poor's or an equivalent rating by another rating agency.
Directors Registrar
CPG Tracy (Chairman) Capita IRG (CI) Limited
IA Morris 2nd Floor, TSB House
DIW Reynolds Le Truchot
CW Sherwell St Peter Port
Guernsey GY1 5BR
Registered Office Investment Manager
Dorey Court, Admiral Park Surrenda-link Limited
St Peter Port 8/11 Grosvenor Court
Guernsey GY1 3BG Foregate Street
Chester CH1 1HG
Manager Banker and Custodian
RCM (UK) Limited Kleinwort Benson (Guernsey) Limited
155 Bishopsgate Dorey Court, Admiral Park
London EC2M 3AD St Peter Port
Guernsey GY1 3BG
Administrator and Secretary Legal Advisers (Guernsey)
Kleinwort Benson (Channel Islands) Carey Olsen
Fund Services Limited 7 New Street
Dorey Court, Admiral Park St Peter Port
St Peter Port Guernsey GY1 4BZ
Guernsey GY1 3BG
Legal Advisers (UK) Auditors
Herbert Smith LLP Deloitte & Touche LLP
Exchange House St Peter Port
Primrose Street Guernsey
London EC2A 2HS
Financial Adviser and Corporate Broker
RBS Hoare Govett Limited
250 Bishopsgate
London EC2M 4AA
Directors
The Directors have been chosen for their investment and commercial
experience and are listed below:
Charles Tracy, Chairman, (aged 62) has over 30 years' experience as
a merchant banker, covering both the investment management and banking fields.
On joining N.M. Rothschild & Sons in 1975 he was made responsible for Asian
and commodity-related investments, working in Malaysia and Hong Kong before
taking up the post of Managing Director of N.M. Rothschild & Sons (C.I.) Ltd.
in 1981, and remaining in that position until 1998. During that period he was
Chairman of the Association of Guernsey Banks and of the Guernsey
International Business Association. He is currently non-executive Chairman of
Louvre Fund Management Limited and the President of the Guernsey Tax Tribunal.
He is a resident of Guernsey.
Ian Morris (aged 49) is a partner at BWCI Group in Guernsey which
through its subsidiary company, BWCI Limited, provides advisory services to a
wide range of insurance company clients including Guernsey life assurance
companies, UK friendly societies and captive insurance companies based in
Guernsey and the Isle of Man. He is a Director Nordben Life & Pensions
Limited, a Guernsey life company. He is a Fellow of the Institute of Actuaries
and is resident in Guernsey.
Ian Reynolds (aged 65) is a former Chief Executive of Commercial
Union Life Assurance Company. He is a director of Liverpool Victoria Friendly
Society and a former consultant actuary at Towers Perrin. Mr Reynolds is a
Fellow of the Institute of Actuaries and a Chartered Director. He is UK
resident.
Chris Sherwell (aged 60) is a non-executive director of a number of
investment-related companies. He was Managing Director of Schroders (CI)
Limited from April 2000 until January 2004 and served as a director of various
Schroder group companies and investment funds. He remains a non-executive
director of Schroders (CI) Limited. His other directorships include
chairmanship of Consulta (Channel Islands) Limited, a specialist investment
management company, and Hermes Absolute Return Fund (Guernsey) Limited, a fund
of hedge funds. He is a resident of Guernsey.
The Investment Manager
The Investment Manager, Surrenda-link, which is authorised and
regulated in the United Kingdom by the Financial Services Authority, was
formed in 1990 and is an investment manager for a range of specialist
investment products.
The Manager
RCM (UK) Limited is manager of a number of closed-ended investment
companies with approximately �1.1 billion of investment company assets under
management as at 31 August 2008. The Manager is responsible for managing the
cash and fixed interest holdings of the Fund during its life and foreign
currency hedging.
FINANCIAL HIGHLIGHTS
For the year ended 30 June 2008
At 30 June 2008 At 30 June 2007
Shares in issue 40,000,000 40,000,000
Total net assets �38,375,705 �47,127,744
Net asset value per Share (see note below) 95.9p 117.8p
Total return on ordinary activities for
the financial year per Share (21.88p) 9.06p
Revenue return per Share (3.65p) (3.30p)
Dividends
The Directors are not declaring a dividend for the year ended 30 June 2008 (2007: nil).
CHAIRMAN'S STATEMENT
For the year ended 30 June 2008
Introduction
This has been a quiet period for portfolio activity, in that policy
maturities have continued to be infrequent, but an active period in markets as
whole. Both factors have implications for the Company, which are discussed in
detail below.
During the financial year, 7 policies matured, with a total face
value of US$ 3.8 million. This compares with 6 policies, with a total face
value of US$ 7.2 million, prior to 30 June 2007. Since the period end, one
further policy has matured, with a face value of US$ 1.0 million, and one
insured under a joint life policy has died. As at 30 June there were a total
of 147 policies in the portfolio, with a face value of US$ 244 million and a
valuation of US$ 101 million. There have been no policy acquisitions, but
premiums continued to be payable on existing holdings, totalling US$ 9 million
during the year.
Valuation
The Board has expressed some concern in recent reports that the low
rate of maturities might reflect an underestimate of life expectancies. A
portfolio of the type that has been acquired would not be expected to show
mortality outcomes precisely in line with the general population, but the
number of deaths experienced to date remains well below the number anticipated
in the valuation basis. The Investment Manager has advised that our experience
closely mirrors that of other, similar, funds, so there is no evidence to
suggest that our portfolio is exceptional in this respect.
The Board, with the assistance of the Investment Manager, has
investigated this matter very carefully. The Board has, for example,
considered whether the newly published mortality tables, known as VBT 2008,
suggest that there has been a significant change in the life expectancy of
individuals similar to our insured parties since the production of the
previous version, known as VBT 2001. Analysis by the Investment Manager of the
differences between the VBT 2008 and VBT 2001 tables indicates that this is
not the case. However, as it contains the most recent data, VBT 2008 will now
be used as a basis of the Company's portfolio valuation process with effect
from 31 October 2008. The reader should note that all figures contained in
this Report therefore relate to the previous basis, using the VBT 2001.
A re-assessment of life expectancies for a sample of policies in
the portfolio was also carried out by the Investment Manager. It was concluded
that this small group of policies did have a slightly longer life expectancy
than originally assumed, but the change was not substantial and there was no
clear trend observable across the policy sample. As a result, the updated life
expectancies were adopted for those policies which had been re-assessed, but
the average increase of 8% in the life expectancy of the sample was not
adopted for the balance of the portfolio.
It has been noted in previous statements by the Board that the
prediction of mortality within a relatively small portfolio such as the
Company's is not an exact science, nor is there any accepted industry standard
for such valuations. In the light of this the Board feels that shareholders
should at least be given the opportunity to see the implications of a wider
range of mortality assumptions - the table set out below of predicted yields
has been adapted in this respect.
Percentage Impact Proportion Exit Price (note 4)
Of Base on Surviving
Mortality example (note 3)
Assumption LE in
(note 1) years
(note
2)
32.19c 37.19c 42.19c 47.19c 52.19c
125% -1.01 51% 10.25% 11.88% 13.44% 14.95% 16.40%
110% -0.45 55% 7.91% 9.76% 11.54% 13.23% 14.86%
100% 0.00 58% 6.15% 8.18% 10.12% 11.97% 13.73%
80% +1.13 64% 2.01% 4.51% 6.86% 9.07% 11.17%
50% +3.91 75% -6.52% -2.86% 0.46% 3.50% 6.31%
Notes
1. The central case assumes that claims experience precisely
matches the valuation basis in force at 30 June 2008. The other scenarios
assume a proportion of this mortality experience.
2. This is the effect of the assumed mortality experience on the
expectation of life for an otherwise normal 80-year-old male non-smoker in
years.
3. This shows the percentage of the policy lives assured assumed to
survive throughout the life of the company.
4. This shows the assumed average realisation values per US$1 of
TLI policy face value in respect of the policies of the surviving lives
insured at the end of life of the Company. The central price highlighted
corresponds to the valuation assumptions used in arriving at the end-June NAV.
The capital markets have witnessed a significant increase in yields
on most financial instruments, and it is therefore not surprising to find that
TLIs have experienced a similar widening of spreads compared with yields on
government bonds. The valuation basis used adds a risk premium to current US$
swap yields to arrive at an assumed internal rate of return for each policy,
according to its expected maturity profile. As of 30 June 2008, risk premiums
as advised to the Board had risen significantly such that the valuation model
incorporated a risk premium of 7.25% compared to an average of 4% as at 30
June 2007. This explains most of the fall in net asset value per Share over
that period. Actual returns will, of course, largely depend on the timing of
policy maturities. The Board considers that the significant increase in risk
premium also to a degree reflects recognition of the uncertainties in
assessing life expectancy.
Risk
The general issue of risk is addressed in more detail this year in
the accounts as required by International Financial Reporting Standards (IFRS)
which have been adopted for the first time this year. One area of risk which
is particularly topical is the risk of default by the issuers of the TLIs,
that is to say the insurance companies themselves. The Company has, for
example, an exposure to American International Group which has been subject to
a downgrading in rating, but which is now majority owned by the US Federal
Government and does not now appear to be at risk of defaulting on its
obligations. As of the balance sheet date (and as of 30 August 2008, for which
further details are provided in the Investment Mangers report which
accompanies the accounts), more than 98% of the Company's policies by value
were issued with companies with an A. M. Best rating of `A' or better. The
Board will continue to monitor the standing of the individual companies and
any relevant re-ratings.
Gearing
One implication arising from the slower than expected rate of
policy maturities that has been carefully monitored by the Board is the
requirement to continue to rely on credit facilities in greater amounts and
for longer periods than had been expected. Gearing, however, remains within
existing covenants. The board is in active discussion with Allied Irish Banks
plc to ensure that adequate credit facilities remain in place, but it is also
looking at alternative ways of funding policy holdings.
Foreign Exchange
A result of the reduction in policy values referred to above is
that the dollar value of the company's forward currency contracts currently
exceeds the dollar value of the portfolio. Bearing in mind that future dollar
profits are anticipated, the Board has decided to leave the current contracts
in place, but it keeps this situation under review in the light of movements
in spot and forward exchange rates.
Outlook
The market for TLIs continues to mature. The frenzied activity that
was seen only two years ago has subsided, partly as market participants have
become better informed. Firms who provide life expectancy assessments are also
becoming more experienced, and we thus expect this to remain a significant
investment field for non-correlated returns.
Charles Tracy
Chairman
23 October 2008
INVESTMENT MANAGER'S REVIEW
For the year ended 30 June 2008
Portfolio Overview
Seven maturing policies were identified during the twelve months
ending 30 June 2008 and this brought the total remaining within the Fund's
portfolio to 147 with exposure to 125 individual lives. Of those seven matured
policies, three were on one male life assured. The remaining four covered
three female lives assured and one male. The face value of the seven
maturities totalled $3.8m.
As at 30 June 2008, a total of 13 policy maturities had been
identified since the Fund's inception. These policies were on ten individual
lives; proceeds totalling $13.2m. All of these maturities occurred early
compared with predicted life expectancy. The incidence of subsequent
maturities and policies remaining in portfolio at the Fund's redemption date
will determine the overall rate of return for the portfolio. One mortality has
been identified since 30 June 2008; the policy on this life has a face value
of $1m. The figures quoted in the `Latest Portfolio Statistics' (as at 31
August 2008) section reflect the maturity.
Portfolio Summary Face Value: $243m
Male/Female Ratio: 65.8%/34.2%
Face weighted average age: 85.3 years
Face weighted average life
expectancy at Purchase: 5.6 years
Total Number of Holding Life
Companies: 34
Life Group (Parent % Total
Company) Ranking by Net Death % Total
Distribution (Top 5) Valuation % Parent Company Benefit Valuation
Lincoln
1 Financial Group 17.6% 15.5%
2 AIG Life Group 14.8% 14.1%
3 AEGON USA Group 11.5% 11.6%
Manulife
4 Financial Group 11.7% 11.4%
MassMutual
5 Financial Group 8.9% 10.0%
Credit Quality % Total Net % Total
Distribution by AM Best Rating Death Benefit Valuation
Holding Life Company A++ 31.6% 46.9%
A+ 66.5% 51.3%
A 0.7% 0.5%
A- 1.2% 1.3%
Total 100.0% 100.0%
Premium Payments
The expected cost of premiums for the twelve months to 30 June 2009
will be approximately $9.3m. Premium obligations remain the main driver of the
Company's cash position. Surrenda-link continues to monitor these commitments
and review all policy statements to identify any capacity to further optimise
the premium payment schedule. This is intended to ensure that returns are
maximised by minimising payments required to keep each policy from falling
into grace. Wells Fargo remain committed to the timely payment of due
premiums.
Outlook
Secondary market demand for Traded Life Interests is less robust
now than earlier in the year. Having recently conducted an analysis of market
purchases, we advised the Board that the appropriate discount rate to be
applied in valuing the portfolio should increase. This discount rate is the
aggregate of current US$ swap rates and a risk premium.
The valuation of policies in the portfolio with reference to their
anticipated maturity profile has also been reviewed. Since the launch of the
Company in 2004, although the policies acquired have been in line with the
original targets, the rate of policy maturities has fallen below levels
originally anticipated by the Investment Manager. Possible reasons for this
have been identified as:
1. The `select effect' of policyholders only selling if they felt
that their current health was reasonable, irrespective of the life expectancy
assessment, may not have been allowed for. Changes to the valuation policy
were made in June 2007 to include a 24-month `select adjustment'.
2. The original life expectancy assessments obtained may have
understated life expectancy. For a sample of policies in portfolio,
re-assessments of life expectancy were undertaken. For the policies assessed
there was an average increase in life expectancy of 8%. Due to the wide range
of adjustments arising from the re-assessments and the modest size of the
sample, it is considered inappropriate to apply this figure to the balance of
the portfolio.
3. There may have been changes in life expectancy in the population
in general, although we are not aware of any significant changes in life
expectancy for the age group concerned.
Following this review, to the extent that revised life expectancy
figures have been obtained for a sample of policies in the portfolio, these
have been adopted for the valuation as at 30 June 2008 and on an ongoing
basis.
Surrenda-link Limited
23 October 2008
MANAGER'S REVIEW
For the year ended 30 June 2008
Cash Management and Borrowings
The Fund's cash flow requirements over the last six months have
partially been met through policy maturities, totalling some $3.8 million at
face value. Nevertheless, by 30th June 2008 total borrowings under the
facility provided by Allied Irish Banks had risen to $28,200,000 and �750,000.
This facility, currently for $30 million (or its sterling equivalent), expires
in March 2009, at which point the borrowing facility will need to be renewed
or replaced. The Fund has an ongoing cash requirement in order to meet premium
obligations and the Manager is therefore currently negotiating with AIB for an
additional $5 million credit facility.
As of 30 June 2008, the level of gearing was 38.8%. The Fund's
maximum level of gearing cannot be predicted precisely because this 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
As of 30 June, and in view of the revaluation of the Fund's assets,
the Board changed the policy with regard to hedging the Fund's US dollar
exposure. Previously, the policy had been to hedge only the net current value
of the US dollar assets, which was implemented by means of forward sales of US
dollars into sterling partly for 31 March 2009 and partly for 30 March 2012.
There was no attempt to hedge anticipated US dollar profits, on the basis that
these could not be quantified in advance. The Board took the decision, upon
the revaluation of the assets, not to reverse any existing forward sales. In
effect therefore, the Fund has now hedged a proportion of anticipated US
dollar profits. As of 30 June, the value of these hedged anticipated profits
amounted to $13.1 million.
RCM (UK) Limited
23 October 2008
DIRECTORS' REPORT
For the year ended 30 June 2008
The Directors have pleasure in submitting their Annual Report and
the Audited Financial Statements for the year ended 30 June 2008.
Principal activities
The Company is a Guernsey registered closed-ended protected cell
company established with one Cell known as the US Traded Life Interests Fund
(the "Fund"). The redeemable preference shares (the `Shares') in the Fund are
listed on the London Stock Exchange. The Company's objective in respect of the
Fund is to provide investors with an attractive capital return through
investment predominantly in a diversified portfolio of U.S. Traded Life
Interests ("TLIs").
Revenue, capital and dividends
The income statement set out on page 22 shows a deficit for the
year amounting to �1,461,054 (2007: deficit �1,319,195) which has been
transferred to revenue reserves. There was a capital deficit for the year
amounting to �7,290,985 (2007: surplus �4,942,950) which has been transferred
to capital reserves. The Directors have not paid an interim dividend (2007:
nil) and do not recommend the payment of a final dividend for the year (2007:
nil).
Assets
At the year end the net assets attributable to the Shares were
�38,375,705 (2007: �47,127,744). Based on this figure the net asset value of a
Share in the Fund was 95.9p (2007: 117.8p).
Share capital
During the year no additional Shares were issued or repurchased.
Substantial shareholdings in the Fund
At 31 August 2008 the holders of Shares in excess of 3% were as
follows:
Shares
%
Investec Asset Management 21.27
Allied Irish Banks 11.56
Midas Capital 6.50
Reliance Mutual 6.00
Allianz Group 5.56
Premier Asset Management 5.52
Rensburg Sheppards Investment Management 5.38
New Star Asset Management 5.00
BestInvest 3.98
HSBC Private Bank 3.60
HSBC Global Asset Management 3.36
Rathbones 3.01
F&C Asset Management 3.00
Crest registration
Shareholders may hold Shares in either certificated or
uncertificated form.
Directors
The Directors serving on the Board during the year, together with
their beneficial interests and those of their families at 30 June 2008, were
as follows:
Shares Shares
30 June 2008 30 June 2007
CPG Tracy (Chairman) - -
IA Morris 5,000 5,000
DIW Reynolds 32,000 32,000
CW Sherwell 17,500 17,500
The Company has no formal service contracts with the Directors.
Corporate Governance
The UK Listing Authority requires all listed companies to disclose
how they have applied the principles and complied with the provisions of the
Combined Code on Corporate Governance ("the Code").
The Financial Services Authority only requires corporate governance
disclosures and compliance with the Code by those listed companies
incorporated in the United Kingdom. The Company is not incorporated in the
United Kingdom although the Board of Directors has chosen to adopt where
possible the principles of the Code and the Turnbull guidance and has sought
to comply throughout the period, insofar as the principles can sensibly be
applied to a company of this nature.
The following statements are therefore included to comply with
these Codes:-
The Board
The Board meets regularly, normally quarterly, and more frequently
if necessary, and retains full responsibility for the direction and control of
the Company.
The Company is led and controlled by a Board comprising
non-executive Directors, all of whom have wide experience and are considered
to be independent. The Board believes that it is in the shareholders' best
interests for the Chairman to be the point of contact for all matters relating
to the governance of the Company and as such has not appointed a senior
independent non-executive Director for the purpose of the Codes. The
appointment of Directors is considered by the Board who are the Nominations
Committee. One third, or the number nearest to but not exceeding one third, of
the Directors shall retire and offer themselves for re-appointment at each
annual general meeting.
The Board reviewed its performance and composition during the year,
and was satisfied on both subjects. In addition, it is considered that the
performance of all Directors continues to be effective and that they have
demonstrated commitment to their roles. The Board has established an Audit
Committee (Chairman: C W Sherwell) which meets when necessary, but at least
twice a year, with the auditors of the Company with a view to providing
further assurance of the quality and reliability of, inter-alia, the financial
information used by the Board in these financial statements.
The Directors are satisfied that the Fund has adequate resources to
continue to operate for the foreseeable future and is financially sound. The
Board is responsible for establishing, maintaining and monitoring the
effectiveness of the Fund's system of internal, financial and other controls.
The internal financial controls operated by the Board include the
authorisation of the investment strategy and regular reviews of the financial
results and investment performance. The system of internal financial controls
can provide only reasonable and not absolute assurance against material
misstatement or loss. The Board has contractually delegated to Surrenda-link
Limited the investment management of the Fund's investments and to RCM (UK)
Limited the management of the cash and foreign exchange elements. The safe
custody of the Fund's investments is managed by Kleinwort Benson (Guernsey)
Limited. Wells Fargo acts as sub-custodian. Kleinwort Benson (Channel Islands)
Fund Services Limited are contracted to provide the Company's administration,
secretarial and accounting functions and Capita IRG (CI) Limited its
registration function. The Board reviews regularly the performance of the
services provided by these companies. A summary of the terms of the agreements
with Surrenda-link Limited and RCM (UK) Limited are set out in note 4 to the
financial statements. After due consideration of the resources and reputation
of Surrenda-link Limited and RCM (UK) Limited, the Board believe it is in the
interests of shareholders to retain the services of both Surrenda-link Limited
and RCM (UK) Limited for the foreseeable future.
The Company maintains Directors' and Officers' liability insurance
which provides insurance cover for Directors against certain personal
liabilities which they may incur by reason of their duties as Directors.
The Company has a procedure whereby the Board is entitled to obtain
independent advice where relevant.
All Directors of the Company are non-executive and Directors' fees
are recommended by the full Board.
The emoluments of the Directors for the period were as follows:
30 June 2008 30 June 2007
� �
CPG Tracy (Chairman) 12,491 12,491
IA Morris 9,993 9,993
DIW Reynolds 9,993 9,993
CW Sherwell 9,993 9,993
42,470 42,470
The figures above represent emoluments earned as Directors during
the relevant financial period.
The Directors receive no other remuneration or benefits from the
Company other than the fees stated above.
Relations with shareholders
In conjunction with the Board, the Manager keeps under review the
register of members of the Fund.
Potential investors are contacted by the Manager.
All shareholders are encouraged to participate in the Company's
annual general meeting. All Directors normally attend the annual general
meeting, at which shareholders have the opportunity to ask questions and
discuss matters with the Directors, the Manager and the Investment Manager. It
is recognised that the Code requires notice of annual general meetings to be
dispatched at least 20 working days before the meeting. The Company intends to
comply with the Code provision in 2008.
Accountability and audit
a) Directors' responsibilities in relation to the financial statements
The Directors have responsibility for ensuring that the Company
keeps accounting records which disclose with reasonable accuracy at any time
the financial position of the Company and which enable them to ensure that the
financial statements comply with the Companies (Guernsey) Law, 1994. They have
general responsibility for taking such steps as is reasonably open to them to
safeguard the assets of the Company and to prevent and detect fraud and other
irregularities.
b) Statement of going concern
After making enquiries, the Directors have formed a judgement at
the time of approving the financial statements that there is a reasonable
expectation of the Company having adequate resources to continue in
operational existence for the foreseeable future. For this reason, they
continue to adopt a going concern basis in preparing the accounts.
c) Internal control
The Directors acknowledge that they are responsible for
establishing and maintaining the Company's system of internal control and
reviewing its effectiveness. Internal control systems are designed to manage
rather than eliminate the failure to achieve business objectives and can only
provide reasonable and not absolute assurance against material misstatement or
loss. They have therefore established an ongoing process designed to meet the
particular needs of the Company in managing the risks to which it is exposed,
consistent with the guidance provided by the Turnbull Committee. Such review
procedures have been in place throughout the full financial year and up to the
date of the approval of the financial statements the Board is satisfied with
their effectiveness. This process involves a review by the Board of the
Company's internal control report and review of the control environment within
the Company's service providers to ensure that the Company's requirements are
met.
The Company, in common with other funds, does not have an internal
audit function. The Board has considered the need for an internal audit
function but has decided to place reliance on the administrator's, manager's,
investment manager's and custodian's systems and internal audit procedures.
These systems are designed to ensure effectiveness and efficient
operations, internal control and compliance with laws and regulations. In
establishing the systems of internal control regard is paid to the materiality
of relevant risks, the likelihood of costs being incurred and costs of
control. It follows therefore that the systems of internal control can only
provide reasonable but not absolute assurance against the risk of material
misstatement or loss. The effectiveness of the internal control systems is
reviewed annually by the Board and the Audit Committee. The Audit Committee
has a discussion annually with the auditor to ensure that there are no issues
of concern in relation to the audit opinion on the accounts and, if necessary,
representatives of the investment manager would be excluded from that
discussion. The Board as decided not to establish a Remuneration and
Management Engagement Committee as these items are dealt with by the Board.
This includes whether the contracts with the Manager and the investment
Manager are in the best interests of shareholders.
Statements of compliance
The Directors believe that the Company has complied with the
provisions of the Code where appropriate, and that it has complied throughout
the year with the provisions where the requirements are of a continuing
nature, except that a Remuneration and Management Engagement Committee has not
been established, and a senior independent director has not been appointed
given that all Directors are independent.
Financial risk profile
The Fund's financial instruments comprise investments, cash and
various items such as debtors and creditors that arise directly from the
Company's operations. The main purpose of these instruments is the investment
of shareholders' funds.
This year, for the first time, in accordance with the requirement
of the UK Listing Authority, the Company has adopted International Financial
Reporting Standards, as set out in note 2 to the accounts.
Your attention is drawn in particular to note 18 to the accounts
which details matters relating to risk management. A summary of some relevant
items is given below.
Market price and longevity risk
One of the main risks arising from the Fund's financial instruments
is longevity risk, i.e. the risk that actual mortality rates differ from
predicted values. To the extent that TLIs are held to maturity this will
affect the rate of return earned on individual policies. To the extent that
policies have to be sold, longevity risk is a key factor in determining the
market value of policies, although market values are also affected by a number
of other factors.
Foreign currency risk
Foreign currency risk is the risk that the fair value of a
financial instrument will fluctuate because of changes in foreign exchange
rates.
Initially, and until funds were required for investment into the
TLIs, the Fund's funds were maintained in Sterling. Funds required for
investment were converted into US Dollars and will remain in US Dollar assets
until their expected conversion into Sterling as the portfolio matures. As the
Company's shares are denominated in Sterling, US Dollar exposure is hedged
through forward sales of US Dollars into Sterling pursuant to the Foreign
Exchange Agreement with Allied Irish Banks plc (see note 18). The Company's
hedging policy is substantially to hedge the present value of its US Dollar
assets, although at present some future anticipated US Dollar profits are also
hedged.
Auditors
A resolution to re-appoint Deloitte & Touche LLP as auditors will
be proposed at the next Annual General Meeting.
By order of the Board.
CPG Tracy IA Morris
Director Director
23 October 2008
DIRECTORS' RESPONSIBILITIES
For the year ended 30 June 2008
The Directors are responsible for preparing the annual report and
financial statements for each financial year which give a true and fair view
of the state of affairs of the Company and the total returns of the Company
for that period and are in accordance with applicable laws. In preparing those
financial statements the Directors are required to:
- select suitable accounting policies and then apply them
consistently;
- make judgements and estimates that are reasonable and prudent;
- state whether applicable accounting standards have been followed;
and
- prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will continue in
business.
The Directors are responsible for keeping proper accounting records
which disclose with reasonable accuracy at any time the financial position of
the Company and to enable them to ensure that the financial statements comply
with The Companies (Guernsey) Law, 1994 and The Protected Cell Companies
Ordinance, 1997. They are also responsible for the system of internal controls
for safeguarding the assets of the Company and hence for taking reasonable
steps for the prevention and detection of fraud and other irregularities.
Directors' responsibility statement
We confirm to the best of our knowledge:
1. the financial statements, prepared in accordance with
International Financial Reporting Standards, give a true and fair view of the
assets, liabilities, financial position and profit or loss of the Company;
2. the Investment Manager's Review and Manager's Review include a
fair review of the performance and position of the Company, together with a
description of the principal risks and uncertainties faced by the Company; and
3. the Directors' Report includes a fair description of the
principal risks and uncertainties faced by the Company.
By order of the Board.
CPG Tracy IA Morris
Director Director
23 October 2008
INDEPENDENT AUDITORS' REPORT
For the year ended 30 June 2008
We have audited the financial statements of Alternative Asset
Opportunities PCC Limited for the year ended 30 June 2008 which comprises the
income statement, the balance sheet, the statement of changes in Redeemable
Participating Preference Shareholders' funds, the cash flow statement, the
portfolio of investments, and the related notes 1 to 18.
These financial statements have been prepared under the accounting
policies set out therein. This report is made solely to the Company's members,
as a body, in accordance with Section 64 of The Companies (Guernsey) Law,
1994. Our audit work has been undertaken so that we might state to the
Company's members those matters we are required to state to them in an
auditors' report and for no other purpose. To the fullest extent permitted by
law, we do not accept or assume responsibility to anyone other than the
Company and the Company's members as a body, for our audit work, for this
report, or for the opinions we have formed.
Respective responsibilities of Directors and Auditors
As described in the statement of Directors' responsibilities, the
Company's Directors are responsible for the preparation of the financial
statements in accordance with International Financial Reporting Standards
("IFRS") and applicable Guernsey law. Our responsibility is to audit the
financial statements in accordance with Guernsey relevant legal and regulatory
requirements, International Standards on Auditing (UK and Ireland) and the
Listing Rules of the Financial Services Authority.
We report to you our opinion as to whether the financial statements
give a true and fair view in accordance with the relevant reporting framework
and are properly prepared in accordance with The Companies (Guernsey) Law,
1994 and The Protected Cell Companies Ordinance, 1997. We also report if, in
our opinion, the Directors' report is not consistent with the financial
statements, if the Company has not kept proper accounting records or if we
have not received all the information and explanations we require for our
audit.
We read the Directors' report and the other information contained
in the Annual Report for the above period as described in the contents section
and consider the implications for our report if we become aware of any
apparent misstatements or material inconsistencies with the financial
statements.
Basis of audit opinion
We conducted our audit in accordance with International Standards
on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit
includes examination, on a test basis, of evidence relevant to the amounts and
disclosures in the financial statements. It also includes an assessment of the
significant estimates and judgements made by the Directors in the preparation
of the financial statements and of whether the accounting policies are
appropriate to the Company's circumstances, consistently applied and
adequately disclosed.
We planned and performed our audit so as to obtain all the
information and explanations which we considered necessary in order to provide
us with sufficient evidence to give reasonable assurance that the financial
statements are free from material misstatement, whether caused by fraud or
other irregularity or error. In forming our opinion, we also evaluated the
overall adequacy of the presentation of information in the financial
statements.
Opinion
In our opinion the financial statements give a true and fair view,
in accordance with IFRS of the state of the Company's affairs as at 30 June
2008 and of its total return for the year ended on that date and have been
properly prepared in accordance with The Companies (Guernsey) Law, 1994 and
The Protected Cell Companies Ordinance, 1997.
Valuation of TLIs
Without qualifying our opinion, we draw attention to the
disclosures in note 2 of the financial statements concerning the Company's
actuarial valuation model applied in valuing its Traded Life Interests (TLIs).
Note 2 describes the method adopted by the Directors to value the TLIs and
note 2 also describes the reason for changing this methodology. The
methodology adopted by the Directors is on the basis that these investments
are intended to be held to maturity or the end of the life of the Fund and
makes assumptions over expected lives and discount rates. Note 2 to the
financial statements highlights that this valuation will differ from the
realisable value of these investments. Note 18 refers to the negotiations with
the Company's bankers to extend the facilities to allow the Company to hold
investments to maturity and/or the end of the life of the Fund.
Deloitte & Touche LLP
Chartered Accountants
St Peter Port
Guernsey
23 October 2008
INCOME STATEMENT
For the year ended 30 June 2008
Notes Year ended 30 June 2008 Year ended 30 June 2007
Revenue Capital Total Revenue Capital Total
� � � � � �
Operating income
Net (loss)/gain on investments 9 - (5,594,955) (5,594,955) - 3,267,606 3,267,606
Other foreign exchange
(loss)/gain - (1,696,030) (1,696,030) - 1,675,344 1,675,344
Interest and similar income 3 70,973 - 70,973 57,404 - 57,404
Operating expenses
Management fee 4 (236,161) - (236,161) (263,778) - (263,778)
Investment manager's fee 4 (230,968) - (230,968) (214,554) - (214,554)
Custodian fee (22,440) - (22,440) (18,803) - (18,803)
Other expenses 5 (265,357) - (265,357) (270,607) - (270,607)
Total operating expenses
before finance costs (754,926) - (754,926) # (767,742) - (767,742)
Operating (loss)/profit before
finance costs (683,953) (7,290,985) (7,974,938) (710,338) 4,942,950 4,232,612
Finance costs
Loan interest payable 13 (777,101) - (777,101) (608,857) - (608,857)
Net (loss)/profit (1,461,054) (7,290,985) (8,752,039) (1,319,195) 4,942,950 3,623,755
(Loss)/Return per redeemable share 7 (3.65p) (18.23p) (21.88p) (3.30p) 12.36p 9.06p
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.
Notes 1 to 18 form an integral part of these financial statements.
BALANCE SHEET
For the year ended 30 June 2008
Notes 30 June 2008 30 June 2007
� � � �
Non-current assets
Financial assets at fair value through profit
or loss 9 50,895,244 53,903,411
50,895,244 53,903,411
Current assets
Cash and cash equivalents 11 1,196,096 1,923,594
Fair value of derivative financial
instruments 9 1,305,132 2,910,855
Other receivables 10 243,501 1,087,754
2,744,729 5,922,203
Total assets 53,639,973 59,825,614
Current liabilities
Loan account 13 14,904,495 12,445,241
Other payables 12 359,773 252,629
Total liabilities 15,264,268 12,697,870
Net assets attributable to redeemable
participating preference shareholders 38,375,705 47,127,744
Redeemable participating preference shareholders' funds
Share premium account 14 39,168,236 39,168,236
Reserves 16 (792,531) 7,959,508
Total equity 38,375,705 47,127,744
Net asset value per redeemable participating
preference share 8 95.9p 117.8p
These financial statements were approved by the board of Directors on 23 October 2008.
Signed on behalf of the board
CPG Tracy IA Morris
Director Director
Notes 1 to 18 form an integral part of these financial statements.
STATEMENT OF CHANGES IN PARTICIPATING
PREFERENCE SHAREHOLDER'S FUNDS
FOR THE YEAR ENDED 30 JUNE 2008
Share Capital Revenue
Premium reserve reserve Total
� � � �
Balance as at 1 July 2007 39,168,236 9,466,098 (1,506,590) 47,127,744
Loss for the year - (7,290,985) (1,461,054) (8,752,039)
Balance as at 30 June 2008 39,168,236 2,175,113 (2,967,644) 38,375,705
For the year ended 30 June 2007
Share Capital Revenue
Premium reserve reserve Total
� � � �
Balance as at 1 July 2006 39,168,236 4,523,148 (187,395) 43,503,989
Profit/(loss) for the year - 4,942,950 (1,319,195) 3,623,755
Balance as at 30 June 2007 39,168,236 9,466,098 (1,506,590) 47,127,744
Notes 1 to 18 form an integral part of these financial statements.
CASH FLOW STATEMENT
For the year ended 30 June 2008
Year ended Year ended
30 June 2008 30 June 2007
� � � �
Cash flows from operating activities
Revenue account operating loss before finance costs for the year (683,953) (710,338)
Interest paid (777,101) (608,857)
Decrease/(increase) in other receivables 844,253 (626,187)
Increase/(decrease) in other payables 107,144 43,236
Premiums paid (4,490,367) (4,831,210)
Proceeds from maturity of investments 1,903,579 3,634,531
Currency (losses)/gains (90,307) 749,253
Net cash outflow from operating activities before interest (3,186,752) (2,349,572)
Financing activities
Increase in loan account 2,459,254 1,895,576
Net cash inflow from financing activities 2,459,254 1,895,576
Reconciliation of cash flow to movement in net cash
Decrease in cash and cash equivalents in the year (727,498) (453,996)
Cash and cash equivalents at the beginning of the year 1,923,594 2,377,590
Cash and cash equivalents at the end of the year - 1,196,096 1,923,594
Notes 1 to 18 form an integral part of these financial statements.
PORTFOLIO OF INVESTMENTS
As at 30 June 2008
Traded Life Interests ("TLIs")
Number Portion of AM Best
of Policies Investment Portfolio Rating
� %
Lincoln National Life Insurance Co 19 7,523,783 14.8% A+
American General Life Insurance Company 13 7,196,960 14.1% A++
Transamerica Life Insurance Co 21 5,639,718 11.1% A+
Massachusetts Mutual Life Insurance Co 11 5,118,495 10.1% A++
John Hancock Life Insurance Company 16 4,827,953 9.5% A++
Indianapolis Life Insurance Company 7 3,638,023 7.1% A+
Pacific Life Insurance Company 6 3,110,193 6.1% A++
MetLife Insurance Company of Connecticut 8 1,728,117 3.4% A+
Security Life of Denver Insurance Co 1 1,393,471 2.7% A+
New York Life Insurance and Annuity Corp 6 1,380,392 2.7% A++
John Hancock Variable Life Insurance Co 3 1,254,582 2.5% A++
Jackson National Life Insurance Company 1 1,238,028 2.4% A+
Columbus Life Insurance Company 2 816,931 1.6% A++
Lincoln Life & Annuity Company of NY 2 677,689 1.3% A+
AXA Equitable Life Insurance Company 4 662,339 1.3% A+
National Western Life Insurance Company 1 631,212 1.2% A-
MONY Life Insurance Company 1 587,660 1.2% A+
ING Life Insurance and Annuity Company 3 483,524 1.0% A+
Genworth Life Insurance Company 1 463,946 0.9% A+
North American Company for L & H Ins 2 315,967 0.6% A+
Aviva Life and Annuity Company of NY 2 306,261 0.6% A+
Lincoln Benefit Life Company 1 295,276 0.6% A+
Transamerica Life Insurance Company 1 247,360 0.5% A+
United of Omaha Life Insurance Company 2 239,592 0.5% A+
ReliaStar Life Insurance Company 2 189,237 0.4% A+
Sun Life Assurance Company of CA 2 177,665 0.3% A++
Banner Life Insurance Company 2 161,422 0.3% A+
MONY Life Insurance Company of America 1 138,720 0.3% A+
Reassure America Life Insurance Company 1 126,397 0.2% A+
Standard Insurance Company 1 114,053 0.2% A
Security Mutual Life Insurance Co of NY 1 98,166 0.2% A
General American Life Insurance Company 1 45,805 0.1% A+
Phoenix Life Insurance Company 1 39,652 0.1% A
Beneficial Life Insurance Company 1 26,654 0.1% A
50,895,244 100.0%
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 June 2008
1. Principal activity
The Company is a Guernsey registered closed-ended protected cell
company established with one Cell known as the US Traded Life Interests Fund
(the "Fund" or "Cell"). The Shares in the Fund are listed on the London Stock
Exchange. The Company's objective in respect of the Fund is to provide
investors with an attractive capital return through investment predominantly
in a diversified portfolio of U.S. Traded Life Interests ("TLIs").
2. Principal Accounting Policies
Adoption of International Financial Reporting Standards ("IFRS")
As a result of a requirement of the United Kingdom Listing
Authority the financial statements contained within the 30 June 2008 Annual
Report and Audited Financial Statements have been converted from UK Generally
Accepted Accounting Practice ("UK GAAP") to IFRS. The financial statements
have been prepared in accordance with the applicable IFRS issued by the
International Accounting Standards Board (the "IASB") and the International
Financial Reporting Interpretations Committee ("IFRIC") of the IASB.
The date of transition to IFRS from UK GAAP and the date of the
opening IFRS balance sheet was 1 July 2006. The transition to IFRS did not
entail any significant changes in accounting policies nor any restatement of
figures.
IFRS 7 (Financial Instruments: Disclosures) was issued by the IASB
on 18 August 2005 and has been applied to these financial statements.
At the date of authorisation of these financial statements, the
following Standard was in issue but not yet effective:
Amendments to IAS 1: Presentation of financial statements - A
revised presentation (effective for annual periods beginning on or after 1
January 2009). The Directors anticipate that the adoption of this standard in
future periods will have no material financial impact other than revised
presentation of the financial statements of the Company. The Directors do not
anticipate that any other standard or interpretation in issue but not yet
effective will have a material impact on the financial statements.
The following accounting policies have been applied consistently in
dealing with items which are considered material in relation to the Company's
financial statements:-
(a) Basis of preparation
The financial statements have been prepared under the historical
cost convention as modified by the revaluation of investments. The financial
statements have been prepared in accordance with International Financial
Reporting Standards as detailed above and with the Statement of Recommended
Practice `Financial Statements of Investment Trust Companies' ("SORP") issued
in December 2005.
The financial statements have been prepared on a total company
basis and not on a cell-by-cell basis as there is currently only one cell. The
only non-cellular assets and liabilities are in respect of the two management
shares of no par value issued at �1 each fully paid represented by cash at
bank. As they are highly immaterial they have been excluded from the financial
statements.
Although the Shares are redeemable, redemption is at the sole
discretion of the Directors, and therefore the shares have been presented as
equity under the provisions of IAS 32 "Financial Instruments: Presentation."
Reporting and Presentational Currency
The financial information shown in the financial statements is
shown in Sterling, being the Company's reporting and presentational currency.
Critical accounting judgements and key sources of estimation
uncertainty
The preparation of Financial Statements in conformity with IFRS
requires management to make judgements, estimates and assumptions that affect
the application of policies and the reported amounts of assets and
liabilities, income and expenses. The estimates and associated assumptions are
based on historical experience and various other factors that are believed to
be reasonable under the circumstances, the results of which form the basis of
making judgements about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates. The estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates are recognised in the year in which
the estimate is revised if the revision affects only that year, or in the year
of the revision and future years if the revision affects both current and
future years. Where such judgements are made they are discussed below.
(b) Valuation of investments
The Company invests in US Traded Life Interests ("TLIs") which it
intends to hold to maturity or until the end of the life of the Fund. The
Company has only invested in Whole of Life and Universal Life policies. All
investments are classified as fair value through profit and loss.
Recognition and basis of measurement
Purchases of investments are recognised on a trade date basis and
are initially measured at cost, being the consideration given.
Valuation
The investments are valued monthly at the Directors' discretion.
The methodology adopted by the Directors intends to reflect the fair value of
the policies. This methodology uses a discounted cashflow method.
The value of a TLI policy is the expected present value of its net
future cashflows. The calculation uses the following data and assumptions
provided by the Investment Manager:
- Death benefit payable under the policy;
- Premiums due under the policy;
- Mortality using the 2001 Valuation Basic Table (Ultimate) as
adjusted using a 24-month `select period' adjustment; and
- A discount rate derived by the Investment Manager based on the
US$ swap curve plus an appropriate risk premium for each period.
There is inherent uncertainty within this basis of valuation in
that it will differ from the realisable value of these investments were the
TLIs to be sold at the balance sheet date.
De-recognition
The Company de-recognises a financial asset when the contractual
rights to cash-flows from the financial asset expire. A financial liability is
de-recognised when the obligation specified in the contract is discharged,
cancelled or expired.
(c) Interest income
Bank deposit interest is accounted for on an accruals basis.
(d) Expenses
Expenses are accounted for on an accruals basis and all amounts
have been allocated to the income statement - revenue account.
(e) Foreign exchange
Foreign currency monetary assets and liabilities are translated
into sterling at the rate of exchange ruling at the balance sheet date.
Transactions in foreign currencies are translated into sterling at the rate
ruling at the date of the transaction. Realised and unrealised foreign
exchange gains and losses are recognised in the Income Statement and in the
capital reserve - realised, and capital reserve - unrealised respectively.
(f) Forward currency contracts
A forward currency contract obliges the Company to receive or
deliver a fixed quantity of currency at a specified price on an agreed basis.
These contracts are accounted for when any contract becomes binding and are
valued in the Balance Sheet at the year end rate. Realised and unrealised
gains are included in the Income Statement and in the capital reserve -
realised, and capital reserve - unrealised respectively.
(g) Bank borrowings
Interest bearing bank loans and overdrafts are recorded when the
proceeds are received. Interest payments are recognised in the Income
Statement in the year in which they are incurred.
3. Income Year ended Year ended
30 June 2008 30 June 2007
� �
Bank deposit interest 70,973 57,404
Total income 70,973 57,404
4. Investment management and management fees
Surrenda-link, the investment manager, was appointed under an
agreement with the Company and other parties dated 16 March 2004 as amended
and restated on 20 July 2004. The agreement may be terminated by either party
giving not less than 12 months notice or shorter notice as the parties may
agree to accept. The basic remuneration of the investment manager is an annual
rate of 0.5% of the gross assets of the Company payable calendar monthly in
arrears. The investment manager has delegated certain of its functions to
Preferred Asset Management Limited ("PAM"). The fee for the provision of these
services by PAM is 2% of the acquisition cost of each relevant policy to be
invoiced monthly. RCM (UK) Limited, the manager, was appointed under an
agreement with the Company dated 16 March 2004 to manage the fixed interest
and near cash assets of the Company in accordance with the investment policy
and to implement the currency hedging facility from time to time approved by
the Directors. Either party giving not less than 12 months notice may
terminate the agreement. In the period under review the Manager has been
remunerated at the rate of 0.5% per annum not including trail commissions paid
to qualifying places and other authorised intermediaries.
5. Other expenses
Year ended Year ended
30 June 2008 30 June 2007
� �
Administration and accountancy fees 52,736 74,767
Broker fees 24,308 31,438
Directors' fees and expenses 43,774 45,155
D&O Insurance 8,959 14,324
Auditors' remuneration 24,432 12,577
Legal fees 15,083 8,717
Printing 1,033 16,648
Safe custody fees 8,362 11,156
Bank fees 29,471 10,514
Sundry expenses 57,199 45,311
265,357 270,607
6. Taxation
The Company is exempt from Guernsey Income Tax under the Income Tax
(Exempt Bodies) (Guernsey) Ordinances 1989 and 1992 and is charged an annual
exemption fee of �600 included in sundry expenses. The Company, as a
collective investment scheme, will be able to continue to apply for exempt tax
status under the revised company income tax regime that came into effect on 1
January 2008.
7. Return per Share
Revenue return per Share is based on the net loss attributable to
the Shares of �1,461,054 (2007: �1,319,195) and on the average number of
Shares in issue of 40,000,000. Capital return per Share is based on the net
capital loss attributable to the Shares of �7,290,985 (2007: gain �4,942,950)
and on the average number of Shares in issue of 40,000,000.
8. Net Asset Value per Share
The diluted and undiluted net asset value per Share is based on net
assets attributable to the Shares of �38,375,705 (2007: �47,127,744) and on
the 40,000,000 Shares in issue at the period end.
9. Investments
(a) Categories of investments Year ended Year ended
30 June 2008 30 June 2007
% of net assets % of net assets
Fair value attributable to Fair value attributable to
� Shareholders � Shareholders
Financial assets at fair value
through profit or loss
TLI policies 50,895,244 97.50% 53,903,411 94.88%
Derivative financial instrument 1,305,132 2.50% 2,910,855 5.12%
52,200,376 100% 56,814,266 100%
(b) Investments at fair value through profit or loss
Year ended Year ended
30 June 2008 30 June 2007
Movements in the year: � �
Opening valuation 53,903,411 49,439,126
Premiums paid 4,490,367 4,831,210
Proceeds from the maturities of investments (1,903,579) (3,634,531)
Realised gain on maturities 844,038 1,568,335
Unrealised movement in (depreciation)/appreciation
on revaluation of investments (6,438,993) 1,699,271
Closing valuation 50,895,244 53,903,411
Comprising:
Closing book cost 55,177,119 51,746,293
Closing unrealised appreciation (4,281,875) 2,157,118
Closing valuation 50,895,244 53,903,411
9. Investments (continued)
(c) Net (loss)/gain on investments held at fair value
through profit or loss Year ended Year ended
30 June 2008 30 June 2007
� �
Realised gain on maturities 844,038 1,568,335
Unrealised movement in (depreciation)/appreciation
on revaluation of investments (6,438,993) 1,699,271
(5,594,955) 3,267,606
(d) Derivative financial instruments
Forward foreign exchange contracts
As at 30 June 2008
Outstanding Average Contract Contract Fair value
contracts exchange rate value USD value GBP GBP
Buy GBP 1.8146 89,000,000 49,045,971 1,305,432
As at 30 June 2007
Outstanding Average Contract Contract Fair value
contracts exchange rate value USD value GBP GBP
Buy GBP 1.8350 74,000,000 41,436,279 2,910,855
The Company hedges its US dollar exposure by entering into forward
sales of US dollars in sterling. At the year end there were fourteen
outstanding forward foreign exchange contracts for the sale of US$89 million
against Sterling; two contracts maturing 31 March 2009 and the remaining
contracts maturing 30 March 2012.
10. Other receivables
30 June 2008 30 June 2007
� �
Sundry debtors 17,631 16,252
Brokers' accounts 225,870 1,070,291
Accrued income - 1,211
243,501 1,087,754
11. Cash and cash equivalents
Any amounts held on deposit or in current accounts by brokers or
financial institutions are included in cash or cash equivalents.
12. Other payables
30 June 2008 30 June 2007
� �
Accrued expenses 359,773 252,629
Amounts due to brokers - -
359,773 252,629
13. Loan facility
As at 30 June 2008 the Company had a US$ 30,000,000 (2007: US$
25,000,000) secured, revolving credit facility with Allied Irish Banks plc.
Interest is payable at LIBOR plus 0.75%. As at 30 June 2008 US$ 28,200,000
(�14,154,495) and �750,000 had been drawn down (2007: US$ 25,000,000
(�12,445,241)). The facility expires in March 2009. The Company intends to
renegotiate the loan facility prior to expiration in March 2009. It is planned
to be renewed at this time. The loan will be repaid with proceeds receivable
from the maturity of the TLIs. See note 18.
14. Share Capital and Share Premium
The share capital of the company is two Management Shares of no par
value and an unlimited number of Redeemable Participating Preference Shares
(the "Shares") of no par value. The two Management Shares were issued at �1
each fully paid and are beneficially owned by the Manager. The Management
Shares do not carry any rights to dividends and holders of Management Shares
are only entitled to participate in the non-cellular assets of the Company on
a winding-up.
40,000,000 Shares were issued in the Fund at �1 per Share on 25
March 2004. The issue costs incurred of �831,764 were debited against the
share premium account to leave net proceeds of the share issue of �39,168,236.
The holders of Shares attributable to the Fund will only be
entitled to participate in the income, profits and assets attributable to that
fund. On a winding up the holders of Shares are only entitled to participate
in the assets of the Fund and have no entitlement to participate in the
distribution of any assets attributable to any other cell.
Holders of Shares are entitled to attend and vote at general
meetings of the Company.
The Directors may at their sole discretion serve notice on
Shareholders of their intention to redeem 25% of their holdings on each of the
two redemption dates of 31 March 2010 and 31 March 2011 with the balance being
repaid following the proposed liquidation date of the Fund of 31 March 2012
providing that such winding up is approved by Shareholders.
15. Share Buy-Backs
By way of an ordinary resolution passed by a written resolution
dated 10 March 2004 the Company took authority, in accordance with Clause 5 of
the Companies (Purchase of Own Shares) Ordinance 1998, to make market
purchases of fully paid Shares, provided that the maximum number of Shares
authorised to be purchased shall be no more than 14.99 per cent. Of the issued
shares of the Company. The minimum price which may be paid for a Share
pursuant to such authority is one penny and the maximum price which may be
paid for a Share is an amount equal to the higher of 105 per cent. of the
average of the middle market quotations for a Share taken from the Official
List for the five business days immediately preceding the date on which the
Share is purchased or the higher of the price of the last independent trade
and the highest current independent bid at the time of purchase. Such
authority will expire at the Annual General Meeting of the Company in 2008
unless such authority is varied, revoked or renewed prior to such date by a
special resolution of the Company in general meeting. During the year under
review no Shares were bought back for cancellation (2007: nil).
16. Other reserves
Capital Reserve Revenue
Realised Unrealised Reserves Total
2008 2008 2008 2008
� � � �
Opening balance 2,821,011 6,645,087 (1,506,590) 7,959,508
Realised gain on maturities 844,038 - - 844,038
Movement in unrealised loss on investments - (6,438,993) - (6,438,993)
Movement in unrealised currency gain on
forward foreign currency contracts - (1,605,723) - (1,605,723)
Movement in unrealised currency losses - (90,307) - (90,307)
Revenue loss for the year - - (1,461,054) (1,461,054)
Closing balance 3,665,049 (1,489,936) (2,967,644) (792,531)
Capital Reserve Revenue
Realised Unrealised Reserves Total
2007 2007 2007 2007
� � � �
Opening balance 1,252,676 3,270,472 (187,395) 4,335,753
Realised gain on maturities 1,568,335 - - 1,568,335
Movement in unrealised loss on investments - 1,699,271 - 1,699,271
Movement in unrealised currency gain on
forward foreign currency contracts - 926,091 - 926,091
Currency gains - 749,253 - 749,253
Revenue loss for the year - - (1,319,195) (1,319,195)
Closing balance 2,821,011 6,645,087 (1,506,590) 7,959,508
17. Related party transactions
Fees earned by the Directors of the Company during the year were �42,470 (2007: �42,470).
18. Financial risk management objectives and policies
The main risks to which the Company is exposed are market and
longevity risk, currency risk, interest rate risk, liquidity risk and credit
risk:
Capital risk management
The capital structure of the Company consists of cash and cash
equivalents and net assets attributable to holders of Shares, comprising
issued Shares, capital reserves and revenue reserves as detailed in Note 16.
The Company does not have any externally imposed capital requirements. At 30
June 2008 net assets attributable to the holders of Shares was �38,375,705
(2007: �47,127,744).
The Company has borrowed US$30 million (US$28.2 million and
�750,000) from Allied Irish Banks and is in the process of negotiating a
further US$5 million credit facility following the Company's year end. The
existence of these borrowings means that Shareholder returns are "geared" and
that these borrowings will need to be repaid prior to any return of capital to
Shareholders.
The Company's investment objective is to provide investors with an
attractive capital return through investment predominantly in a diversified
portfolio of US Traded Life Interests ("TLIs"). The Company has invested its
assets principally in a range of TLIs on the lives of US citizens aged between
80 and 90 years.
The Board has overall responsibility for allocating the assets of
the Company in accordance with the investment objective and policy. The
Investment Manager has identified on behalf of the board TLIs that are
consistent with the Company's investment objective and policy.
The TLIs acquired are held to maturity or otherwise disposed of
towards the end of the life of the Company. The Company is responsible for
payment of policy premiums. The Company has acquired a portfolio comprising
147 TLIs. All TLIs acquired are Whole-of-Life or Universal Life policies.
The average age of the lives assured is 85. No policies where the
age of the life of the assured is less than 78 or greater than 92 have been
acquired. No viatical policies (that is, a policy on the life of an insured
who is terminally ill and with a life expectancy of less than 2 years) have
been acquired.
The TLIs acquired are policies issued by a range of US life
insurances companies. Each underlying life insurance company has an A.M. Best
or a Standard and Poors' credit rating of at least "A" at the time of
acquisition of the relevant policy. A.M. Best is a U.S. credit rating agency
which provides the most comprehensive coverage of the U.S. life company
sector. Not more than 15 per cent. of the gross assets of the Company, were
invested in life policies issued by any single US life insurance company or
group.
As part of the purchase process, the Investment Manager will advise
the Board regarding the suitability of each TLI that is offered for sale by a
TLI supplier, based on criteria set by the Board.
Once a TLI was deemed suitable, the Investment Manager has obtained
all information required to determine and advise the Company on the
appropriate price at which that TLI should be purchased.
The Investment Manager has engaged the services of tracking agents
to monitor the status of lives insured in respect of TLIs purchased by the
Company. The agents use tracking methods to ensure both the Company and the
Investment Manager are notified in a timely manner following the death of an
insured. Upon receipt of notification of the death of an insured, the death
certificate will be forwarded to the Sub-Custodian, who then forwards to the
relevant life insurance company with the original policy document. The life
insurance company will usually pay the Company the full face value of the
policy within 30 days of receipt of the requisite documents.
Market and longevity risk
The Company's exposure to market risk is comprised mainly of
movements in the valuation of the TLI portfolio, which, in turn, also reflects
the Company's assessment of longevity (life expectancy) for each policy. The
Company's basis of valuation is to arrive at an estimate of market value by
applying an Internal Rate of Return (IRR) based on market rates to estimates
of future cash flow, based on the life expectancy of the life assured and
future premiums payable.
The IRR assessment is based on the Investment Manager's own
successful bids (that is the IRR implied by bids that have been accepted by
the seller of a policy). The results are compared to US$ swap interest rates
on a three-month rolling average basis, to derive a risk premium. The IRR is
thus the sum of the risk premium and the swap rate for the appropriate life
expectancy. Every quarter, the risk premiums are re-assessed and discussed
between the Board and the Investment Manager.
As of 30 June 2007 a range of risk premiums applied, from 3.75% for
shorter life expectancies to 5.25% for longer life expectancies, with an
average risk premium of 4%. The swap rate averaged around 5.3%, resulting in
an average IRR of about 9.3%. In June 2008 the Investment Manager reported
having a small number of successful bids for certain key life expectancies. As
a result, it was agreed by the Board, on the recommendation of the Investment
Manager, to adopt a single risk premium for all life expectancies. As of 30
June 2008 the weighted average swap yield had fallen to 4.1%; this also allows
for the fact that there is some shortening of life expectancies with the
elapse of time. All life expectancy terms now have the same risk premium of
7.25%, resulting in an overall average IRR of 11.6%. Thus the fall in swap
interest rates of 1.2% has been more than compensated by the increase in risk
premium of 3.25%. In short, the IRRs used have increased by over 200 basis
points (2%) since June 2007 and this increase has had a negative effect on the
net asset value per Share.
These IRRs are in line with the IRRs being obtained by the
Investment Manager in the open market at the moment, but a lack of success in
some market areas may suggest that they are not indicative of the market as a
whole. The question of whether the IRRs reflect the market or simply a change
in the Investment Manager's client strategies was discussed between the Board
and the Investment manager and the conclusion was that, while the IRRs may not
be wholly representative, they are the best information currently available,
given the lack of public information on successful transactions in this
marketplace. At 30 June 2008, should the IRR used have increased by 1 per cent
with all other variables remaining constant, the decrease in net assets
attributable to Shareholders for the year would amount to �1,637,744
(US$3,262,877).
At 30 June 2008, should the IRR used have decreased by 1 per cent
with all other variables remaining constant, the increase in net assets
attributable to Shareholders for the year would amount to �1,748,475 (US$
3,483,487).
The life expectancy which applies to each policy is based on the
original third party medical assessments made at the time of purchase,
adjusted for any relevant factors, which include the period since original
purchase and any information available to the Investment Managers which
affects life expectancy. The cash flow projections resulting from this life
expectancy allow for a 24-month select period but are otherwise based on
standard actuarial tables.
At 30 June 2008, should the remaining life expectancy of the
insured have increased by 20% with all other variables remaining constant, the
decrease in net assets attributable to Shareholders for the year would amount
to �10,528,733 (US$20,976,395). In order to achieve this, mortality would have
to be 23% lower than that assumed in the valuation. At 30 June 2008, should
the remaining life expectancy of the insured have decreased by 20% with all
other variables remaining constant, the increase in net assets attributable to
Shareholders for the year would amount to �11,466,658 (US$22,844,866). In
order to achieve this, mortality would have to be 36% higher than that assumed
in the valuation.
Currency risk
Currency risk is the risk that the fair value of future cash flows
of a financial asset will fluctuate because of changes in foreign exchange
rates.
The TLIs held by the Company are denominated exclusively in US
Dollars, whereas the issued Shares are denominated in Sterling. The Company
hedges this exposure through the sale of US Dollars into Sterling. The Company
has forward sold US$89 million which means that at the current valuation, the
Company's net exposure to US Dollars was US$13.1 million. In the event that
expected future US$13.1 million profits are not crystallised, the Company will
be exposed to the risk of currency losses.
In the event of a fall in the value of the Fund's assets or a loss
on the Fund's forward currency contracts, the Fund may not be able to comply
with the borrowing covenants contained in the Credit Facility Agreement and
may be obliged to sell policies on disadvantageous terms in order to raise
cash.
At 30 June 2008 the Company's net currency exposure was as follows:
2008 2007
� �
U.S. Dollar 37,903,068 41,458,170
Less: Effect of forward foreign
exchange contracts (44,671,987) (36,837,913)
(6,768,919) 4,620,257
The above analysis excludes amounts due from brokers and short term
other receivables and other payables.
At 30 June 2008, had the exchange rate between the US Dollar and
Pound Sterling increased by 5% with all other variables held constant, the
increase in net assets attributable to Shareholders would amount to
approximately �322,329 (2007: decrease �220,012). A decrease of 5% would
amount to a decrease in net assets attributable to Shareholders of
approximately �356,509 (2007: increase �243,171).
Interest rate risk
The Company's interest-bearing financial assets and liabilities
expose it to risks associated with the effects of fluctuations in the
prevailing levels of market interest rates on its financial position and cash
flows.
The Company holds modest amounts of cash on deposit and the only
interest bearing liability is the loan facility, therefore exposure to
interest rate changes is limited to the effect on cash and the loan facility.
The following table details the Company's exposure to interest rate
risk at 30 June 2008:
Financial
assets/(liabilities)
on which no interest Floating rate financial
is paid assets/(liabilities) Total
2008 2007 2008 2007 2008 2007
� � � � � �
Sterling 1,305,132 2,910,855 (716,223) 256,299 588,909 3,167,154
U.S. Dollars 51,121,114 54,973,702 (12,992,176) (10,777,946) 38,128,938 44,195,756
52,426,246 57,884,557 (13,708,399) (10,521,647) 38,717,847 47,362,910
The above analysis excludes short term other receivables and other
payables as the material amounts are non-interest bearing.
If interest rates had been decreased by 50 basis points throughout
the year with all other variables remaining constant, the increase in net
assets attributable to Shareholders for the year would amount to approximately
�137,084 (2007: �105,216). An increase of 50 basis points would have had an
equal, but opposite effect.
Liquidity risk
Liquidity risk is the risk that the Company will encounter
difficulty in meeting obligations associated with its financial liabilities.
The Company has exposure to liquidity risk as it is holds a loan
facility for US$30,000,000 as detailed in note 13.
The maturity profile of the Company's financial assets and
liabilities is set out below (the TLIs are broken down in terms of the
estimated remaining life expectancy of the insured, at valuation rather than
undiscounted face value):
As at 30 June 2008
Financial assets:
1 month or 1 to 3 3 to 12 1 to 5
less months months years >5 years Total
At fair value through profit and loss 77,979 - - 21,599,055 29,218,210 50,895,244
Derivative financial instrument - - 580,358 724,774 - 1,305,132
Other receivables 243,501 - - - - 243,501
Cash and cash equivalents 1,196,096 - - - - 1,196,096
1,517,576 - 580,358 22,323,829 29,218,210 53,639,973
Financial liabilities:
Loan facility - - (14,904,495) - - (14,904,495)
Other payables (359,773) - - - - (359,773)
(359,773) - (14,904,495) - - (15,264,268)
1,157,803 - (14,324,137) 22,323,829 29,218,210 38,375,705
As at 30 June 2007
Financial assets:
1 month or 1 to 3 3 to 12 1 to 5
less months months years >5 years Total
At fair value through profit and loss 77,730 - - 21,035,785 32,789,896 53,903,411
Derivative financial instrument - - - 2,910,855 - 2,910,855
Other receivables 1,087,754 - - - - 1,087,754
Cash and cash equivalents 1,923,594 - - - - 1,923,594
3,089,078 - - 23,946,640 32,789,896 59,825,614
Financial liabilities:
Loan facility - - (12,445,241) - - (12,445,241)
Other payables (252,629) - - - - (252,629)
(252,629) - (12,445,241) - - (12,697,870)
2,836,449 - (12,445,241) 23,946,640 32,789,896 47,127,744
In order to address the short term impact of the loan facility, the
Directors intend to renegotiate the loan facility prior to expiration in March
2009, it is planned to be renewed at this time. Once renegotiated, the loan is
expected to be repaid with proceeds receivable from the maturity of the TLIs.
Were it to be necessary, the Company could sell TLIs in order to
repay the loan. It is noted that the valuation methodology does not assume
sales of TLIs, rather that they would be held to maturity. In the event of a
sale, the proceeds received would in all likelihood be lower than the
valuation.
Credit risk
Credit risk is the risk that one party to a financial instrument
will cause a financial loss for the other party by failing to discharge an
obligation.
Credit risk on liquid funds and derivative financial instruments is
limited because the counterparties are banks with high credit ratings assigned
by international credit rating agencies.
The Directors manage this risk by monitoring the credit quality of
its bankers on an ongoing basis.
If the credit quality of the bank deteriorates, the Company would
look to move the short-term deposits or cash to another bank.
Fair value disclosure
In the opinion of the Directors there is no material difference
between the values presented in the financial statements and the fair values
of the financial assets and liabilities.
END
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