TIDMTLI
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Half-Yearly Announcement of Results
For the period 1 July 2008 to 31 December 2008
At a meeting of the Board of Directors held on 27 February 2009, the
half yearly accounts for the Company for the period 1 July 2008 to 31
December 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 period 1 July
2008 to 31 December 2008, but is derived from those accounts. Printed
accounts for the period 1 July 2008 to 31 December 2008 will be
delivered to Shareholders during March 2009.
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 March 2009. 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
2008 to 31 December 2008.
Company Secretary
Kleinwort Benson (Channel Islands) Corporate Services Limited
Telephone number: 01481 727111
Fax number: 01481 728317
27 February 2009
Dorey Court
Admiral Park
St Peter Port
Guernsey
GY1 3BG
INVESTOR INFORMATION
For the period from 1 July 2008 to 31 December 2008
Alternative Asset Opportunities PCC Limited (the "Company") was
registered on 27 February 2004 in Guernsey, Channel Islands 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" or "Cell") which has a planned
life of approximately 8 years from launch.
The Fund's redeemable participating preference shares were listed on
the Official List of the UK Listing Authority and commenced trading
on the London Stock Exchange on 25 March 2004. This Half Yearly
Report and Unaudited Condensed Financial Statements cover the period
from 1 July 2008 to 31 December 2008.
The financial information for the period 1 July 2007 to 30 June 2008
is derived from the financial statements delivered to the UK Listing
Authority. The Auditors reported on these accounts, their report was
unqualified although it included an emphasis of matter paragraph in
connection with the valuation of traded life interests and did not
contain a statement under Section 65 (3) of The Companies (Guernsey)
Law, 1994.
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").
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 LLP
Exchange
House
Regency Court
Primrose
Street
Glategny Esplanade
London, EC2A
2HS
St Peter Port
Guernsey, GY1 3HW
INVESTOR INFORMATION (CONTINUED)
For the period from 1 July 2008 to 31 December 2008
Directors
The Directors have been chosen for their investment and commercial
experience and are listed below:
Charles Tracy, Chairman, (aged 63) 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 of 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 (61) 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 continued as a non-executive director of Schroders (CI) Limited
until coming off the board on 31 December 2008. 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 adviser for a range of
specialist investment products.
The Manager
RCM (UK) Limited is manager of a range of investment trusts. Total
assets managed by RCM (UK) Limited amounted to approximately GBP6.7
billion as at 31 December 2008.
Auditors
On 1 December Deloitte & Touche LLP changed its name to Deloitte LLP.
RESPONSIBILITY STATEMENT
For the period from 1 July 2008 to 31 December 2008
We confirm to the best of our knowledge
a. the half yearly report and unaudited condensed financial
statements have been prepared in accordance with IAS 34;
b. the interim management report (contained in the Chairman's
Statement, Investment Manager's report and Manager's report) includes
a fair review of the information required by DTR 4.2.7R (indication
of important events during the first six months and description of
principal risks and uncertainties for the remaining six months of the
year); and
c. the interim management report includes a fair review of the
information required by DTR 4.2.8R (disclosure of related party
transactions and changes therein).
By order of the Board
CPG Tracy
Director
CW Sherwell
Director
27 February 2009
FINANCIAL HIGHLIGHTS
For the period from 1 July 2008 to 31
December 2008
01.07.08 01.07.07 01.07.07
to 31.12.08 to 31.12.07 to 30.06.08
Redeemable participating
preference shares in 40,000,000 40,000,000 40,000,000
issue
Total net assets at 37,518,243 46,473,978 38,375,705
period end
Net asset value per 93.80p 116.18p 95.94p
redeemable participating
preference share
Total deficit on ordinary (2.14p) (1.63p) (21.88p)
activities for the
financial
period/year
Revenue deficit per (1.65p) (2.45p) (3.65p)
redeemable participating
preference share for the
financial period/year
Dividends
The directors are not declaring a dividend for the period ended 31
December 2008.
CHAIRMAN'S STATEMENT
For the period from 1 July 2008 to 31 December 2008
Introduction
As in recent periods there has been only modest portfolio activity.
During the six month period to 31 December 2008, 4 policy maturities
were identified, with a total face value of US$ 7.0 million. This
compares with 7 policies with a face value of US$ 6.0 million in the
year to 30 June 2008, and 6 policies with a total face value of US$
7.2 million, in the period from the Company's launch to 30 June 2007.
Although now received in full, the proceeds from recent policy
maturities had not been received as at the balance sheet date, and
this is reflected in the significant balance of 'other
receivables'shown in the accounts.
As at 31 December 2008 there were a total of 143 policies in the
portfolio, with a face value of US$ 237 million and a valuation of
US$ 96 million. There have been no policy acquisitions since
completion of the original policy purchase programme, but premiums
continued to be payable on existing holdings, totalling US$ 4.7
million during the half year.
The principal risks facing the Company i.e. valuation, credit,
gearing and foreign exchange are discussed below.
Valuation
The valuation remains the best estimate of the Board and the
Investment Manager of the current value of the portfolio based on
expected future cash flows. The three major components of the
valuation are life expectancy (LE) assessments, the tables of
predicted mortalities based on these life assessments and the
discount rate (internal rate of return, or IRR) used to arrive at a
present value of the resulting cash flow projections. Each component
has caused the Board and the Investment Manager some difficulty over
the last six months meaning that there has been a higher than usual
degree of uncertainty in arriving at the current valuation.
Past reports have alluded to changing views on life expectancy from
the main US life assessors. In broad terms, there has recently been a
significant increase in LE assessments. In so far as new LE
assessments have been made on the Company's policies, these have been
incorporated into valuations, and the Company will continue its
present approach of selecting policies for LE assessment and
incorporating the results in valuations. So far, however, no
consistent trend has been observed within the policies in the
portfolio that have been assessed and the Board therefore has not
adopted a portfolio-wide LE increase.
As previously observed, so far actual rates of mortality have been
significantly below those predicted in the mortality tables. This may
be due to underestimation of LEs, but it may also be due to the
particular characteristics of the portfolio. Experience in the
development of mortality in portfolios of TLIs is not yet
sufficiently extensive to explain what seems to be an industry-wide
pattern in this respect.
The Company's current valuation policy uses a combination of swap
yields, to represent market interest rates, with a risk premium,
derived from actual trades, to arrive at an overall IRR. In recent
weeks, swap yields have been falling sharply, but there has been
insufficient trading volume to give a reliable indicator of risk
premiums. To the extent that there is market information available to
the Investment Manager, there is no evidence of any fall in market
IRRs to reflect the general fall in interest rates over the period;
if anything, IRRs rose somewhat to reflect general investor caution.
Under these circumstances the board decided to retain for the
December month-end the overall IRRs used in the November month-end
valuation, which, in turn, on the recommendation of the Investment
Manager, included a higher risk premium to offset decreases in swap
yields. The valuation has thus not as yet reflected the fall in swap
yields and the risk premium now stands at over 9% compared to 7.25%
as at 30 June 2008. The board will keep this matter under regular
review but believes a conservative approach is the correct one in the
absence of better market information.
To some extent valuation uncertainties are reflected in the market
pricing of policies, and this is an added reason why the Board has
thus not so far adopted a portfolio-wide LE increase. The table of
predicted yields set out below, however, gives shareholders the
opportunity to see the effect on portfolio values of a wide range of
mortality assumptions. The Board will continue actively to monitor
market information and to keep the valuation assumptions under
review.
IRRs Based On A Projection From The Current net asset value per
redeemable participating preference share (NAV)"of 93.8p
IRR Based On Exit Price Range5:
Impact on
Variation LE for Valuation
in 80yr old Proportion of -10c -5c 0c 5c 10c
Mortality1 male Surviving3 Surviving
non-smoker Policies4
2
125% -1.09 56% 41.c +10.5% +13.3% +16.0% +18.6% +21.1%
110% -0.48 59% 41.3c +7.3% +10.6% +13.6% +16.5% +19.2%
100% 0.00 62% 41.6c +4.9% +8.5% +11.8% +14.9% +17.9%
80% 1.20 68% 42.1c -0.6% +3.7% +7.7% +11.4% +14.8%
50% 4.12 78% 42.9c -12.5% -6.0% -0.4% +4.5% +9.0%
30% 8.00 86% 43.4c -24.9% -15.4% -7.9% -1.5% +4.1%
Ignore Medical
Underwriting & Use 77% 43.9c -10.0% -4.0% +1.3% +6.0% +10.3%
Full VBT Table6
Notes:
1. The central case (100%) assumes that claims experience
matches the valuation basis in force at 31 December 2008. The other
scenarios assume mortality experience is higher (e.g. 110%) or lower
(e.g. 80%).
2. This shows the effect of the selected mortality
experiences on the life expectation (in years) for an otherwise
normal 80-year-old male non-smoker.
3. This shows the percentage of the lives assured which are
assumed to survive throughout the life of the company.
4. This shows the assumed average realisation values (per
US$1 of TLI policy face value) for the surviving lives at the end of
the Company's life. The central case (41.6c) corresponds to the
valuation assumptions used in arriving at the end-December NAV.
5. This shows how returns might be expected to vary should
realisation values differ from those shown in column 4 by the margins
shown.
6. This shows the returns using the full US Society of
Actuaries 2008 Valuation Basic Table (VBT)"Select Table without any
adjustment for the life expectancy assessments.
Risk
There have been no major changes in the financial standing of the
insurers who have issued the policies in the portfolio. As at the
period end more than 98% of the Company's policies by value were
issued by companies with an A.M. Best rating of 'A' or better. This
figure has not changed significantly since 30 June. It is however to
be noted that the percentage of policies by value with companies
rated A+ or better fell over the same period from 98% to 84%, a
reflection of generally more cautious ratings across the sector.
Gearing
In the early stages of the period, policy maturity proceeds were
modest and it became apparent that a standby facility of US$ 5
million would be helpful. This was negotiated, and was partially
drawn down at the period end. Drawings under this standby have, as at
the date of this report, been repaid out of the proceeds of the
maturing policies referred to above. The availability of credit lines
is particularly important to the Company in view of the fixed nature
of premium payments due, the inherently unpredictable nature of cash
flow arising from policy maturities and the lack of liquidity in the
TLI market. Negotiations for the renewal of the overall facility in a
total amount of US$38 million, were satisfactorily concluded shortly
prior to the date of this report subject only to the formal signing
of the documentation by the bank and the Company's board.
Foreign Exchange
As at 30th June, the decline in portfolio values had resulted in the
portfolio being over-hedged. During the period therefore certain
forward contracts were closed out with the result that the Board's
original policy of hedging only the current value of the US$ assets
has been resumed.
Outlook
The market for TLIs is currently subdued, as investor appetite for
all forms of investment is affected by negative sentiment generally.
Quietly, however, the market continues to mature: improved regulation
in the United States, improved standards of disclosure, the emergence
of more professional intermediary firms; more accurate LE assessments
and a greater understanding of the attractions of TLIs are all in
evidence.
Charles Tracy
Chairman
27 February 2009
INVESTMENT MANAGER'S REVIEW
For the period from 1 July 2008 to 31 December 2008
Market Background
Heightened awareness of the secondary market in Life Settlements was
apparent throughout 2008 with a continued increase in policy supply
volumes clearly evident. During the first half of 2008 investor
demand predominantly from investment banks and financial institutions
rose to meet this supply of policies. During the second half of the
year however this dynamic was severely curbed with the ensuing
onslaught of adverse economic and financial market conditions.
The resulting lack of investor capital culminated in a significant
contraction in market competition in the final quarter and the market
continues to be significantly subdued. Market intelligence suggests
that this dislocation of supply and demand has allowed those few
investors remaining active to seek highly opportunistic purchasing
opportunities from forced sellers with little or no options but to
liquidate their policy holdings. We are therefore seeing such buyers
demanding significantly increased projected yields but trading
volumes remain low and such transactions are not being publicised.
During the period, the Investment Manager received an increased
number of enquiries from vendors and intermediaries seeking buyers
for their surplus supply of policies as their existing funding
sources withdrew. Some major industry participants were seen to
streamline their operations and there have been signs of changes in
strategy with some withdrawing from the market but others pushing
forward with expansion plans including one major US Life Settlement
provider, Coventry opening a London office.
In the latter part of 2008 a number of the life expectancy providers
made amendments to their mortality tables and some made modifications
to their own proprietary methodologies. These changes were made
principally as a consequence of the release earlier in the year by
the US Society of Actuaries of its updated reference tables (2008
Valuation Basic Table). The result of these changes suggests a
lengthening of life expectancies for policies being transacted in the
secondary market which is more in line with the Fund's own actual
experience. Market participants have generally welcomed these updates
and refinements and the improved consensus on life expectancy
predictions is being seen as a positive for the market moving
forward.
Other occurrences in the period include American International Group
(AIG) in September reporting over $18.5 billion in losses during the
previous nine months, prompting several ratings agencies to cut its
credit ratings. The Fund holds policies with a number of AIG
insurance subsidiaries, all of which are subject to separate ratings
and additional regulatory protections which would protect policy
holders in the event of the Group company encountering further
ratings changes.
The regulation of the life settlement market continued apace during
2008 with thirty-one states proposing legislation that would address
Life Settlements or amend existing Life Settlement laws, resulting in
thirteen adopting new laws. As the Fund has ceased to purchase
policies the impact of this legislation will be extremely limited as
it is all directly focussed on the regulation of the purchase of
policies from the secondary market and is not retrospective.
In line with general market sentiment the Investment Manager expects
that the decline in purchasing activity experienced of late, together
with reducing commission rates, will see the less efficient market
participants struggle in 2009 in the wake of reduced capital. The
prospective consolidation of providers and other market
intermediaries should improve the market share of the higher quality
operators, viewed as a positive move for future market participants.
Similar to other investment markets at present, commitments of
capital remain subdued in the Life Settlement space. The
low-correlation dynamic associated with Life Settlements and the
yield potential presently available is expected to attract interest
once credit conditions improve.
Portfolio Review
As at 31st December 2008, there were 143 active policies on 122
unique lives. The total net death benefit was $237m. Three deaths
have been identified in the six month period, resulting in four
policy maturities. All were male lives assured and occurred before
the assessed life expectancies. The realised proceeds totalled
$7.0m.
Since inception, there have been 13 deaths resulting in the maturity
of 17 policies in the portfolio. Realised proceeds total $20.5m.
The remaining policies in the Fund are held across thirty-four
holding life companies. The minimum AM Best rating is A-. The
current distribution by holding life company rating is shown below:
+-------------------------------------------------------------------+
| | Number of Holding Life | % Investment Value |
| AM Best Rating | Companies | |
|----------------+-----------------------------+--------------------|
| A++ | 7 | 33.0% |
|----------------+-----------------------------+--------------------|
| A+ | 21 | 51.0% |
|----------------+-----------------------------+--------------------|
| A | 5 | 14.7% |
|----------------+-----------------------------+--------------------|
| A- | 1 | 1.3% |
|----------------+-----------------------------+--------------------|
| | 34 | 100.0% |
+-------------------------------------------------------------------+
Approximately 65% of the remaining policies in portfolio were issued
on male lives.
The portfolio valuation for AAO is an actuarial calculation that uses
US swap yields plus a risk premium to arrive at the present value of
the cash flows expected to arise on each policy. During recent
months the decrease in market interest rates has led to a decrease in
the swap yields but there is no evidence of purchase yields in the
Life Settlement market being similarly affected. On the contrary,
there are indications that yields have increased over recent months
but this is not possible to verify due to a lack of market
transactions. For this reason, yields have been held at 30 November
2008 levels for both the 31 December 2008 and the 31 January 2009
valuation. The Investment Manager in conjunction with the Directors
continues to evaluate market trends and all available data in order
to provide a consistent and reliable mark-to-model valuation for the
Fund's assets.
Surrenda-link Limited
27 February 2009
MANAGER'S REVIEW
For the period from 1 July 2008 to 31 December 2008
Cash Management and Borrowings
As at 31st December, the full amount available under the principal,
$30 million tranche of the borrowing facility provided by Allied
Irish Banks had been drawn down. In addition, $2 million of a second,
$5 million, standby tranche also available under that facility had
been drawn down. Since the period end, the standby tranche has been
fully repaid and the balance outstanding under the principal tranche
has been reduced to $28 million.
The above facility expires in March 2009, and so the Company's cash
flow requirement up to that date can be met. A new $38 million
facility [subject only to the formal signing of the documentation by
the bank and the Company's board] that expires in March 2010 has now
been renegotiated with Allied Irish Banks. This is subject to terms
and conditions that are similar to those relating to the present
facility, except that the margin over US$ Libor has risen to 2.00% on
the first $28 million borrowed and 2.75% on the balance of $10
million. The total facility will ensure that, in the worst case of
there being no further policy maturities, the Company's cash flow
requirements can be met into the first quarter of 2010.
It is expected that maturities over the next 12 months will allow the
company to continue as a going concern until March 2010, the date of
renegotiation of the loan.
As at 31st December, the level of gearing was 87.5%. This takes
account of the unrealised losses on the forward sales of US dollars
(see below). The maximum level of gearing to be reached cannot be
predicted precisely because the outcome 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 Company hedges its US dollar exposure by means of forward sales
of US dollars. As highlighted in the last report, recent policy has
been to anticipate some level of profit from maturing policies in
determining the extent of the hedge, but by 31st December 2008 the
extent of this anticipation was minimal. Following the re-purchase of
US dollars through forward contracts during the period, the net open
position as of 31 December was the forward sale of $71 million all
for 30 March 2012. The unrealised loss on this position amounted to
GBP10,953,819, and once the unrealised FX profit on the underlying
policies, denominated in US dollars, is taken into account, there was
a total net loss on the Company's FX positions equivalent to 2.5
pence per share.
RCM (UK) Limited
27 February 2009
INDEPENDENT REVIEW REPORT
For the period from 1 July 2008 to 31 December 2008
We have been engaged by the Company to review the condensed set of
financial statements in the half-yearly financial report for the six
months ended 31 December 2008 which comprise 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 related notes 1 to 15. We
have read the other information contained in the half-yearly
financial report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in the
condensed set of financial statements.
This report is made solely to the Company in accordance with
International Standard on Review Engagements 2410 issued by the
Auditing Practices Board. Our work has been undertaken so that we
might state to the Company those matters we are required to state to
them in an independent review 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, for our review work,
for this report, or for the conclusions we have formed.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has
been approved by, the directors. The directors are responsible for
preparing the half-yearly financial report in accordance with the
Disclosure and Transparency Rules of the United Kingdom's Financial
Services Authority.
As disclosed in note 2, the annual financial statements of the
Company are prepared in accordance with IFRSs. The condensed set of
financial statements included in this half-yearly financial report
has been prepared in accordance with International Accounting
Standard 34, "Interim Financial Reporting".
Our responsibility
Our responsibility is to express to the Company a conclusion on the
condensed set of financial statements in the half-yearly financial
report based on our review.
Scope of Review
We conducted our review in accordance with International Standard on
Review Engagements (UK and Ireland) 2410, "Review of Interim
Financial Information Performed by the Independent Auditor of the
Entity" issued by the Auditing Practices Board for use in the United
Kingdom. A review of interim financial information consists of making
inquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review
procedures. A review is substantially less in scope than an audit
conducted in accordance with International Standards on Auditing (UK
and Ireland) and consequently does not enable us to obtain assurance
that we would become aware of all significant matters that might be
identified in an audit. Accordingly, we do not express an audit
opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us
to believe that the condensed set of financial statements in the
half-yearly financial report for the six months ended 31 December
2008 is not prepared, in all material respects, in accordance with
International Accounting Standard 34 and the Disclosure and
Transparency Rules of the United Kingdom's Financial Services
Authority.
Emphasis of Matter - Valuation of TLIs
In arriving at our conclusion, we have considered the adequacy of the
disclosure made in note 2 of the financial statements concerning the
Company's actuarial model applied in valuing its Traded Life
Interests ("TLIs"). Note 2 describes the method adopted by the
directors to value the TLIs. 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. There is an inherent
uncertainty within this basis. Note 2 to the financial statements
highlights that this valuation will differ from the realisable value
of these investments were the TLIs to be sold at the balance sheet
date. Note 12 refers to the negotiations with the Company's bankers
to extend the facilities which are necessary to allow the Company to
hold investments to maturity and/or the end of the life of the Fund.
Deloitte LLP
Chartered Accountants
St Peter Port
Guernsey
27 February 2009
CONDENSED INCOME STATEMENT
For the period from 1 July 2008 to 31 December 2008
01.07.08 to 31.12.08 01.07.07 to 31.12.07 01.07.07 to 30.06.08
Revenue Capital Total Revenue Capital Total Revenue Capital Total
GBP GBP GBP GBP GBP GBP GBP GBP GBP
Operating income
Net gains on - 17,084,221 17,084,221 - 1,258,705 1,258,705 - (5,594,955) (5,594,955)
investments
Other foreign - (17,280,572) (17,280,572) - (931,623) (931,623) - (1,696,030) (1,696,030)
exchange losses
Interest and 21,094 - 21,094 25,944 - 25,944 70,973 - 70,973
similar income
Operating
expenses
Management fee (114,443) - (114,443) (255,066) - (255,066) (236,161) - (236,161)
Investment (120,808) - (120,808) (171,595) - (171,595) (230,968) - (230,968)
manager's fee
Custodian fee (9,580) - (9,580) (13,481) - (13,481) (22,440) - (22,440)
Other expenses - - - (170,107) - (170,107) (265,357) - (265,357)
Total operating
expenses
before finance (244,831) - (244,831) (610,249) - (610,249) (754,926) - (754,926)
costs
Operating
(loss)/profit
before finance (223,737) (196,351) (420,088) (584,305) 327,082 (257,223) (683,953) (7,290,985) (7,974,938)
costs
Finance costs
Interest payable (299,352) - (299,352) (396,543) - (396,543) (777,101) - (777,101)
Net (523,089) (196,351) (719,440) (980,848) 327,082 (653,766) (1,461,054) (7,290,985) (8,752,039)
(loss)/profit
(Deficit)/Return (1.31p) (0.49p) (1.80p) (2.45p) 0.82p (1.63p) (3.65p) (18.23p) (21.88p)
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.
CONDENSED BALANCE SHEET
As at 31 December 2008
31.12.08 31.12.07 30.06.08
GBP GBP GBP
Non-current assets
Financial assets at fair value 66,051,919 57,131,795 50,895,244
through profit or loss
66,051,919 57,131,795 50,895,244
Current assets
Cash and cash equivalents 397,196 496,688 1,196,096
Fair value of derivative financial - 2,110,490 1,305,132
instruments
Other receivables 4,104,515 147,492 243,501
4,501,711 2,754,670 2,744,729
Total assets 70,553,630 59,886,465 53,639,973
Current liabilities
Loan account 21,874,359 12,894,776 14,904,495
Fair value of derivative financial 10,953,819 - -
instruments
Other payables 207,209 517,711 359,773
Unrealised loss on forward foreign
exchange contract - - -
Total liabilities 33,035,387 13,412,487 15,264,268
Net assets attributable to
redeemable participating
preference shareholders 37,518,243 46,473,978 38,375,705
Redeemable participating
shareholders' funds
Share premium account 39,168,236 39,168,236 39,168,236
Reserves (1,649,993) 7,305,742 (792,531)
Total equity 37,518,243 46,473,978 38,375,705
Net asset value per redeemable 93.80p 116.18p 95.94p
participating preference share
These financial statements were approved by the board of Directors on
27 February 2009.
Signed on behalf of the board.
CPG Tracy
Director
CW Sherwell
Director
CONDENSED STATEMENT OF CHANGES IN REDEEMABLE PARTICIPATING PREFERENCE
SHAREHOLDERS' FUNDS
For the period from 1 July 2008 to 31 December 2008
Share Capital Revenue Total
Premium Reserve Reserve
GBP GBP GBP GBP
At 1 July 2007 39,168,236 9,466,098 (1,506,590) 47,127,744
Profit/(loss) for the - 327,082 (980,848) (653,766)
period
At 31 December 2007 39,168,236 9,793,180 (2,487,438) 46,473,978
Loss for the period - (7,618,067) (480,206) (8,098,273)
At 30 June 2008 39,168,236 2,175,113 (2,967,644) 38,375,705
Loss for the period - (196,351) (661,111) (857,462)
At 31 December 2008 39,168,236 1,978,762 (3,628,755) 37,518,243
CONDENSED CASH FLOW STATEMENT
For the period from 1 July 2008 to 31 December 2008
01.07.08 01.07.07 01.07.07
to 31.12.08 to 31.12.07 to 30.06.08
GBP GBP GBP
Cash flows from operating
activities
Revenue account operating loss
before finance costs for the (361,759) (584,305) (683,953)
period
Interest paid (299,352) (396,543) (777,101)
(Increase)/decrease in other (3,861,014) 940,262 844,253
receivables
(Decrease)/increase in other (152,564) 265,082 107,144
payables
Premiums paid (2,683,369) (2,111,697) (4,490,367)
Proceeds from maturity of 4,610,915 142,018 1,903,579
investments
Currency losses (132,787) (131,258) (90,307)
Net cash outflow from operating (2,879,930) (1,876,441) (3,186,752)
activities
Financing activities
Issue of shares -
Issue costs paid -
Increase in loan account 2,081,030 449,535 2,459,254
Net cash inflow from financing 2,081,030 449,535 2,459,254
activities
Reconciliation of cash flow to
movement in net cash
Decrease in cash and cash (798,900) (1,426,906) (727,498)
equivalents in the period
Cash and cash equivalents at the 1,196,096 1,923,594 1,923,594
beginning of the period
Cash and cash equivalents at the 397,196 496,688 1,196,096
end of the period
PORTFOLIO OF INVESTMENTS
As at 31 December 2008
Traded Life Interests
(TLIs)
Number Portion of AM Best
Issuer of Policies Investment Portfolio Rating
GBP %
American General Life 9,339,151 14.0%
Insurance Company (TX) 13 A
Lincoln National Life 8,932,480 13.5%
Insurance Company 19 A+
Transamerica Life Insurance 7,634,607 11.6%
Company 21 A+
Massachusetts Mutual Life 6,916,128 10.5%
Insurance Company 11 A++
John Hancock Life Insurance 5,430,014 8.2%
Company 13 A++
Pacific Life Insurance 4,473,066 6.8%
Company 6 A++
Indianapolis Life Insurance 3,801,980 5.8%
Company 6 A+
Jackson National Life 2,499,876 3.8%
Insurance Company 1 A+
MetLife Insurance Company 2,336,624 3.5%
of Connecticut 8 A+
New York Life Insurance and 1,944,638 2.9%
Annuity Corporation 6 A++
Security Life of Denver 1,878,586 2.8%
Insurance Company 1 A+
John Hancock Variable Life 1,693,155 2.6%
Insurance Company 3 A++
Columbus Life Insurance 1,094,115 1.7%
Company 2 A++
Lincoln L & A Company of NY 2 901,433 1.4% A+
AXA Equitable Life 894,984 1.4%
Insurance Company 4 A+
National Western Life 869,427 1.3%
Insurance Company 1 A-
MONY Life Insurance Company 1 800,135 1.2% A+
ING Life Insurance and 672,898 1.0%
Annuity Company 3 A+
Genworth Life Insurance 619,413 0.9%
Company 1 A+
Aviva Life and Annuity 416,047 0.6%
Company of NY 2 A+
North American Company for 411,027 0.6%
L & H Ins 2 A+
Lincoln Benefit Life 390,258 0.6%
Company 1 A+
Transamerica Financial Life 332,318 0.5%
Insurance Company 1 A+
United of Omaha Life 313,884 0.5%
Insurance Company 2 A+
ReliaStar Life Insurance 244,939 0.4%
Company 2 A+
Sun Life Assurance Company 236,810 0.4%
of CA (U.S.) 2 A++
Banner Life Insurance 221,337 0.3%
Company 2 A+
MONY Life Insurance Company 189,010 0.3%
of America 1 A+
Reassure America Life 157,186 0.2%
Insurance Company 1 A+
Standard Insurance Company 1 151,845 0.2% A
Security Mutual Life 104,089 0.2%
Insurance Company of NY 1 A
General American Life 60,629 0.1%
Insurance Company 1 A+
Phoenix Life Insurance 54,421 0.1%
Company 1 A
Beneficial Life Insurance 35,409 0.1%
Company 1 A
66,051,919 100.0%
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
For the period from 1 July 2008 to 31 December 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 redeemable participating
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").
2 Principal Accounting Policies
(a) Basis of Preparation
The condensed financial information for the six months ended 30 June
2008 has been prepared in accordance with IAS 34 'Interim Financial
Reporting'. The condensed interim financial information should be
read in conjunction with the annual financial statements for the year
ended 30 June 2008, which have been prepared in accordance with
International Financial Reporting Standards.
The accounting policies applied in the condensed financial statements
are consistent with those of the annual statements for the year ended
30 June 2008, as described in those financial statements.
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.
All investments are classified as fair value through profit and loss.
Recognition and basis of measurement
Purchases of investments were recognised on a trade date basis and
were initially measured at cost, being the consideration given.
Valuation
The methodology adopted by the Directors is designed to reflect the
fair value of the policies. This methodology uses a discounted cash
flow method.
The value of a TLI policy is the expected present value of its net
future cash flows. The calculation uses the following data and
mortality rate assumptions provided by the Investment Manager:
- Death benefit payable under the policy;
- Premiums due under the policy;
- Mortality using the 2008 Valuation Basic Table (Ultimate) as
adjusted by third party life expectancy assessments and 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 mark to model basis of
valuation that this valuation will differ from the realisable value
of these investments were the TLIs to be sold at the balance sheet
date. The Directors and the Investment Manager are considering the
assumptions used for this model in the light of recent information.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (CONTINUED)
For the period from 1 July 2008 to 31 December 2008
2 Principal Accounting Policies
(b) Valuation of investments (continued)
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) Going concern
The accounts have been prepared on a going concern basis. The
Directors believe that this basis is appropriate as the Company has
net assets significantly in excess of its liabilities. The bank loan
(see note 12) was extended to March 2010 in February 2009. If the
bank loan were to be recalled the Directors believe that the Company
could realise sufficient assets over time in order to repay the loan,
albeit at amounts that would differ from their current fair value.
The Directors have reviewed the cash flow and projected income and
expenses over the next twelve months and deemed that the Company has
adequate financial resources to meet its obligations.
3 Income
01.07.08 01.07.07 01.07.07
to 31.12.08 to 31.12.07 to 30.06.08
GBP GBP GBP
Bank deposit interest 21,094 25,944 70,973
Total income 21,094 25,944 70,973
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 has been at an annual rate of 0.5% of the net
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 was 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. The Manager receives a
fee at a rate of up to 1% per annum of the net assets payable monthly
in arrears. In the period under review the Manager has been
remunerated at the rate of 0.5% per annum net of trail commissions
paid to qualifying placees and other authorised intermediaries.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (CONTINUED)
For the period from 1 July 2008 to 31 December 2008
5 Other expenses
01.07.08 01.07.07 01.07.07
to 31.12.08 to 31.12.07 to 30.06.08
GBP GBP GBP
Administration fees 17,585 24,013 52,736
Broker fees 3,289 12,500 24,308
Directors' fees and expenses 21,906 22,479 43,774
D&O Insurance 11,262 6,843 8,959
Auditors' remuneration 18,272 5,069 24,432
Legal fees 18,873 26,557 15,083
Printing 5,521 5,069 1,033
Safe custody fees 4,234 4,339 8,362
Sundry expenses 37,080 63,238 86,670
138,022 170,107 265,357
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 GBP600 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 GBP661,111 (December 2007: GBP980,848 loss, June 2008:
GBP1,461,054 loss) and on the average number of Shares in issue of
40,000,000. Capital return per redeemable participating preference
share is based on the net capital loss attributable to the Shares of
GBP196,351 (December 2007: GBP327,082 gain, June 2007: GBP7,290,985 loss)
and on the average number of Shares in issue of 40,000,000.
8 Net Asset Value per Share
The net asset value per Share is based on net assets attributable to
Shares of GBP37,518,243 (December 2007: GBP46,473,978, June 2008:
GBP38,375,705) and on the 40,000,000 Shares in issue at the period end.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (CONTINUED)
For the period from 1 July 2008 to 31 December 2008
9 Investments
(a) Investments at fair value
through profit or loss
01.07.08 01.07.07 01.07.07
to 31.12.08 to 31.12.07 to 30.06.08
GBP GBP GBP
Opening valuation 50,895,244 53,903,411 53,903,411
Purchases at cost 2,683,369 2,111,697 4,490,367
(including premiums paid)
Maturities - proceeds (4,610,915) (142,018) (1,903,579)
Realised gains on maturities 2,670,192 96,385 844,038
Unrealised movement in 14,414,029 1,162,320 (6,438,993)
appreciation /
(depreciation) of investments
Closing valuation 66,051,919 57,131,795 50,895,244
Comprising:-
Closing book cost 55,919,765 53,812,357 55,177,119
Closing unrealised 10,132,154 3,319,438 (4,281,875)
appreciation /
(depreciation)
Closing valuation 66,051,919 57,131,795 50,895,244
(b) Net gain/(loss) on 01.07.08 01.07.07 01.07.07
investments held
at fair value through profit to 31.12.08 to 31.12.07 to 30.06.08
or loss
GBP GBP GBP
Realised gain on maturities 2,670,192 96,385 844,038
Unrealised movement in 14,414,029 1,162,320 (6,438,993)
appreciation
/(depreciation) on
revaluation of investments
17,084,221 1,258,705 (5,594,955)
10 Other receivables
31.12.08 31.12.07 30.06.08
GBP GBP GBP
Sundry debtors 2,879 955 17,631
Maturity proceeds receivable 4,101,442 145,696 225,870
Accrued income 194 841 -
4,104,515 147,492 243,501
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (CONTINUED)
For the period from 1 July 2008 to 31 December 2008
11 Other payables
31.12.08 31.12.07 30.06.08
GBP GBP GBP
Accrued expenses 207,209 517,711 359,773
Amounts due to brokers - -
207,209 517,711 359,773
12 Loan facility
The Company has a US$ 35,000,000 (December 2007: US$ 30,000,000, June
2008 US$ 30,000,000) secured, revolving credit facility with Allied
Irish Banks plc. Interest is payable at LIBOR plus 0.75% on the
balance up to US$ 30,000,000 and at LIBOR plus 2% on the balance over
US$ 30,000,000. As at 31 December 2008 US$ 32,000,000 (GBP21,874,359)
had been drawn down (December 2007: US$ 25,000,000 (GBP12,594,776) and
GBP300,000, June 2008: US$ 28,200,000 (GBP14,154,495) and GBP750,000). The
facility expires in March 2009.
Since the period end, the Directors have agreed to extend the loan
facility to March 2010 subject only to the formal signing of the
documentation by the bank and the Company's board. The renewed loan
will be subject to terms and conditions that are similar to those
relating to the existing facility, except that the margin over LIBOR
has risen to 2.00% on the first US$ 28,000,000 borrowed and 2.75% on
the balance of US$ 10,000,000. 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.
13 Other reserves
Unrealised Total
31.12.08 31.12.08
GBP GBP
Opening balance (1,489,936) (1,489,936)
Realised gain on maturities - -
Movement in unrealised gain on - -
investments
Movement in unrealised currency loss
on forward
foreign currency contracts (12,258,951) (12,258,951)
Movement in unrealised currency loss (5,021,621) (5,021,621)
Revenue loss for the period - -
Closing balance (18,770,508) (18,770,508)
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (CONTINUED)
For the period from 1 July 2008 to 31 December 2008
13 Other reserves (continued)
Unrealised Total
31.12.07 31.12.07
GBP GBP
Opening balance 6,645,087 6,645,087
Realised gain on maturities - -
Movement in unrealised gain on 1,162,320 1,162,320
investments
Movement in unrealised currency loss
on forward
foreign currency contracts (800,365) (800,365)
Movement in unrealised currency loss (131,258) (131,258)
Revenue loss for the period - -
Closing balance 6,875,784 6,875,784
Unrealised Total
30.06.08 30.06.08
GBP GBP
Opening balance 6,645,087 6,645,087
Realised gain on maturities - -
Movement in unrealised loss on (6,438,993) (6,438,993)
investments
Movement in unrealised currency gain
on forward
foreign currency contracts (1,605,723) (1,605,723)
Movement in unrealised currency loss (90,307) (90,307)
Revenue loss for the year - -
Closing balance (1,489,936) (1,489,936)
14 Related party transactions
Fees earned by the Directors of the Company during the period were
GBP21,530 (December 2007: GBP21,541, June 2008: (12 months): GBP42,470).
15 Forward foreign exchange contracts and other foreign exchange
losses
The Shares in issue are Sterling denominated but the TLI portfolio
and borrowings are denominated in US Dollars. In accordance with the
Company's investment objectives and policies the Company hedges the
currency exposure of its net US Dollar assets into Sterling using
forward foreign exchange contracts. At the period end there were 16
outstanding forward foreign exchange contracts for the net sale of
US$ 71 million against Sterling; 3 maturing on 31 March 2009 and 13
maturing on 30 March 2012. The fair value of the forward foreign
exchange contracts is shown on the Condensed Balance Sheet as 'Fair
value of derivative financial instruments'.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (CONTINUED)
For the period from 1 July 2008 to 31 December 2008
15 Forward foreign exchange contracts and other foreign exchange
losses (continued)
The forward foreign exchange contracts in place have resulted in a
balance of unrealised foreign exchange loss of GBP10,953,819 at the
period end (December 2007: GBP2,110,490 gain, June 2008: GBP1,305,132
gain). As a result the movement in unrealised foreign exchange gain
or loss on forward contracts during the period was a loss of
GBP12,258,951 (December 2007: GBP800,365 loss, June 2008: GBP1,605,723
loss), which is included under 'Other foreign exchange losses' on the
face of the Condensed Income Statement.
The Company also incurred currency foreign exchange losses during the
period of GBP5,021,621 (December 2007: GBP131,258, June 2008 GBP90,307).
These losses arose predominantly on the revaluation of the Company's
US$ denominated borrowings (see Note 12) and are also included under
'Other foreign exchange losses' on the face of the Condensed Income
Statement.
In total, the Company incurred foreign exchange losses of GBP17,280,572
(December 2007: GBP931,623 loss, June 2008: GBP1,696,030 loss). As
intended, the total losses offset the foreign exchange gain made on
the underlying portfolio of TLI policies.
=--END OF MESSAGE---
This announcement was originally distributed by Hugin. The issuer is
solely responsible for the content of this announcement.
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