TIDMTLI
RNS Number : 6660E
Alternative Asset Opps PCC Ltd
23 December 2009
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Annual Financial Report Announcement
For the period ended 31 August 2009
At a meeting of the Board of Directors held on 18 December 2009, the final
accounts for the Company for the period from 1 July 2008 to 31 August 2009 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 ended 31 August 2009, but is derived
from those accounts. Statutory accounts for the period ended 31 August 2009 will
be delivered to Shareholders during January 2010. 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. The Company will publish full financial
statements that comply with International Financial Reporting Standards in
December 2009. This announcement has been prepared using accounting policies
consistent with those set out in the Company's annual report and financial
statements for the period ended 31 August 2009.
The Annual General Meeting of the Company will be held on 24 February 2010.
Peter Ingram
Company Secretary
Telephone number: 020 7065 1467
23 December 2009
155 Bishopsgate
London
EC2M 3AD
INVESTOR INFORMATION
For the period from 1 July 2008 to 31 August 2009
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, 2008. It was established with one Cell known
as the US Traded Life Interests Fund (the "Fund") which had a planned life of
approximately 8 years from the date of the launch. Following a Special
Resolution passed at an Extraordinary General Meeting on 28 August 2009, the
Articles of Incorporation were amended to move from having a fixed life in
respect of the Company's Cell, US Traded Life Interests Fund (terminating on 31
March 2012) to offering shareholders annual continuation votes from the
Company's 2010 Annual General Meeting onward.
With effect from 1 September 2009, the Company has been managed with a view to
being approved as an Investment Trust within the meaning of the Taxes Act, and
has been resident in the UK for tax purposes from that date.
The Company'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 14 month period from 1 July 2008 to 31 August
2009. The Company's next period of account will be for the ten month period to
30 June 2010 and annually thereafter.
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 31 August 2009 were $33.4 million.
It is intended that the proceeds of TLIs which mature are used, after the
deduction of expenses:
* first, to reduce and then eliminate bank 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 may 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 Registrars (Guernsey) |
| IA Morris (resigned 28 August | Limited |
| 2009) | Longue Hougue House |
| DIW Reynolds (Chairman of the | St Sampson |
| Audit | Guernsey, GY1 3US |
| Committee from 28 August 2009) | |
| JPHS Scott (appointed 22 | |
| October2009) | |
| CW Sherwell (resigned 28 August | |
| 2009) | |
| (Chairman of the Audit Committee | |
| until | |
| 28 August 2009) | |
| SM Zein (appointed 1 September | |
| 2009) | |
| | |
+------------------------------------+------------------------------------+
| Registered Office | Investment Manager |
| Dorey Court, Admiral Park | SL Investment Management Limited |
| St Peter Port | (formerly Surrenda-link Limited) |
| Guernsey GY1 3BG | 8/11 Grosvenor Court |
| | Foregate Street |
| | Chester, CH1 1HG |
| | |
+------------------------------------+------------------------------------+
| Manager | Banker and Custodian |
| RCM (UK) Limited | Kleinwort Benson (Guernsey) |
| 155 Bishopsgate | Limited |
| London EC2M 3AD | Dorey Court, Admiral Park |
| | St Peter Port |
| | Guernsey, GY1 3BG |
| | |
+------------------------------------+------------------------------------+
| Secretary | Sub Custodian |
| (with effect from 1 September | Wells Fargo Bank plc |
| 2009) | 299 South Main Street |
| RCM (UK) Limited | 12th Floor |
| 155 Bishopsgate | Salt Lake City |
| London EC2M 3AD | UT 84111-2263 |
| Represented by PWI Ingram FCIS | |
+------------------------------------+------------------------------------+
| Administrator and Secretary | Legal Advisers (Guernsey) |
| (Secretary until 31 August 2009) | Carey Olsen |
| Kleinwort Benson (Channel Islands) | Carey House |
| Fund Services Limited | Les Banques |
| 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 |
| | |
+------------------------------------+------------------------------------+
| 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 64) 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.
John Scott (aged 57) was appointed a Director on 22 October 2009. He is
currently a director of several UK investment trusts and is Chairman of Scottish
Mortgage and of Dunedin Income Growth. Mr Scott held a number of senior
appointments at Lazard Brothers & Co., Limited between 1981 and 2001. Prior to
that, he worked at Jardine Matheson & Co., Limited. He is a Fellow of the
Chartered Insurance Institute and of the Chartered Institute for Securities and
Investment. He is UK resident.
Ian Reynolds (aged 66) 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.
Saad Zein (aged 42) was appointed a Director on 1 September 2009. Mr Zein is a
Senior Managing Director of Aladdin Capital Management UK LLP. Prior to this,
his career has been spent as an investment banker with particular focus on
credit markets and structured products, including US traded life interests. He
was employed by Dresdner Kleinwort Wasserstein between 1999 and 2009, where he
held a number of senior positions. He is UK resident.
The Investment Manager
The Investment Manager, SL Investment Management Limited (formerly Surrenda-link
Limited), which is authorised and regulated in the United Kingdom by the
Financial Services Authority, was incorporated 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 GBP990 million of such assets under management in a range of
investment companies and investment trusts as at 31 October 2009. 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 period from 1 July 2008 to 31 August 2009 | | | |
+-----------------------------------------------------------+---------------+---+---------------+
| | | | |
+-----------------------------------------------------------+---------------+---+---------------+
| | At 31 | | At 30 June |
| | August | | 2008 |
| | 2009 | | |
+-----------------------------------------------------------+---------------+---+---------------+
| | | | |
+-----------------------------------------------------------+---------------+---+---------------+
| Shares in issue | 40,000,000 | | 40,000,000 |
+-----------------------------------------------------------+---------------+---+---------------+
| | | | |
+-----------------------------------------------------------+---------------+---+---------------+
| Total net assets |GBP37,064,596 | |GBP38,375,705 |
| | | | |
+-----------------------------------------------------------+---------------+---+---------------+
| | | | |
+-----------------------------------------------------------+---------------+---+---------------+
| Net asset value per Share (see note below) | 92.7p | | 95.9p |
+-----------------------------------------------------------+---------------+---+---------------+
| | | | |
+-----------------------------------------------------------+---------------+---+---------------+
| Total return on ordinary activities for the financial | (3.28p) | | (21.88p) |
| year per Share | | | |
+-----------------------------------------------------------+---------------+---+---------------+
| | | | |
+-----------------------------------------------------------+---------------+---+---------------+
| Revenue return per Share | (3.81p) | | (3.65p) |
+-----------------------------------------------------------+---------------+---+---------------+
| | | | |
+-----------------------------------------------------------+---------------+---+---------------+
| Dividends | | | |
+-----------------------------------------------------------+---------------+---+---------------+
| The Directors do not propose a dividend for the period from 1 July 2008 to 31 August |
| 2009 (2008: nil). |
+-----------------------------------------------------------+---------------+---+---------------+
CHAIRMAN'S STATEMENT
For the period from 1 July 2008 to 31 August 2009
Introduction
In contrast to previous statements, there is considerable activity to report.
Changes to Company's operations
This statement covers a 14 month period, the first consequence of the changes
made to the Company's operations as a result of shareholders' approval of
proposals published in July 2009. Details of these were set out in the circular
sent out at the time, a summary of which are set out below:
* To operate the Company with a view to being approved as an Investment Trust
within the meaning of the United Kingdom Income and Corporation Taxes Act 1988
in due course (including the adoption of tax residency in the UK);
* To alter the proposed life of the Company so as to introduce more flexible
proposals for the Company's portfolio liquidation;
* To adopt new articles reflecting the above, and generally to update the articles
to reflect changes in Guernsey law; and
* To alter the Company's year end to 31 August for 2009 and to revert to 30 June
for subsequent years. This was completed to ensure that the commencement of the
Company's tax accounting period is aligned with the financial reporting period.
As a result of approval of these proposals by Shareholders, a number of changes
have taken place:
Firstly, two of the Company's Guernsey-resident directors, Chris Sherwell and
Ian Morris, have resigned from the Board in keeping with the Company's new tax
residence. They have been replaced by Saad Zein and John Scott, both of whom are
UK resident and whose details are to be found elsewhere in this report. Both
Chris and Ian have given valuable and unstinting service to the Board, and I
wish to express my appreciation of their work since the Company's inception.
Equally, I welcome Saad and John as our new members; both have extensive
experience and will complement the skills of the remaining board members well.
Secondly, the company secretarial arrangements have been taken over by RCM (UK)
Limited in the person of Peter Ingram, an experienced Company Secretary, who has
already made a valuable contribution during this period of change.
Thirdly, we have lodged appropriate documents with our sub-custodian, Wells
Fargo Bank, to evidence the change to the Company's tax status, as result of
which proceeds from several policies which had not been received as at the
period end have now been received, without deduction of US withholding tax, as
envisaged in the circular. The effects of this on borrowing levels are referred
to below.
Fourthly, in accordance with its aim of being approved in due course as a UK
Investment Trust, the Company has acquired a small holding of gilts.
Fifthly, the agreed reductions in annual fees payable to the Investment Manager
and the Manager were implemented.
Finally, the Board has been considering how to report to investors, now that the
assumption of a fixed life for the Company is no longer correct. This is
discussed further below, along with the possible implications for the Company's
foreign exchange hedging programme.
Portfolio developments
A summary of portfolio maturities since inception is given in the following
table:
+-------------------------+-----------+------------+------------+
| Period |Inception | 1/7/07 - | 1/7/08 - |
| |- 30/6/07 | 30/6/08 | 31/8/09 |
+-------------------------+-----------+------------+------------+
| Number of policies | 7 | 6 | 7 |
| matured | | | |
+-------------------------+-----------+------------+------------+
| Value of policies | $9.3m | $3.9m | $14.8m |
| matured | | | |
| ($ million) | | | |
+-------------------------+-----------+------------+------------+
| Premiums paid ($ | $18.8m | $9.1m | $10.4m |
| million) | | | |
+-------------------------+-----------+------------+------------+
3 further policies have matured since 31 August 2009, with a face value of $7.6
million.
As at 31 August 2009 there were a total of 139 policies in the portfolio with a
face value of $228 million. No policies have been acquired in the period, but
premiums continue to be payable on existing holdings, totalling $10.4 million
during the 14 month period. There has been one policy disposal, resulting in
proceeds of $0.55 million.
It is encouraging to see that the value of maturities realised has materially
increased over the last fourteen months, and has been sufficient to cover
premium commitments and expenses. However, for the portfolio to deliver
satisfactory returns, the rate of maturities needs to increase from the current
level.
Valuation
Previous reports have commented on valuation methodology. In keeping with stated
policy, the Board has continued to obtain up-to-date assessments of life
expectancies for a sample of policies during the period. New assessments were
obtained on 16 policies during the period; as before, in broad terms, allowing
for the passage of time, these suggest somewhat longer life expectancies than
had originally been advised, although the range of variation is large,
confirming the general impression that life expectancy assessment has not yet
developed into a precise science. Where new life expectancies have been
obtained, these have been incorporated into the valuation data.
The second major factor in valuing policies is the discount rate applied to
expected future cash flows, being made up of a combination of swap yields (to
represent market interest rates) with risk premiums based on the Investment
Manager's experience of actual policy transactions. As previously explained,
transaction volume in the TLI market place is currently insufficient to give a
reliable indicator of risk premiums; there is some evidence of forced sales at
discounted prices, but as yet normal trading volumes have not been
re-established. As at 31 August 2009 the overall discount rate was 12% being
made up of an average market swap yield of 2.6% and an effective risk premium of
9.4% (weighted by value).
In previous reports, the Board has presented the outcome of the valuation
process, and also included a range of outcomes assuming variations in mortality
experience and the sale price of the 'rump' of policies required at the end of
the original fixed life of the Company. Shareholders will now have the
opportunity to vote annually on the continuation of the Company at the AGM from
2012 onwards. The presentation of the projected return has therefore been
altered accordingly.
Valuation (continued)
The following table, as with previous tables, gives shareholders a range of
possible outcomes, all based on the NAV per share as at 31 August 2009. There
are three major variables. Firstly, on the left hand side, a range of possible
mortality outcomes is shown with 100% being the valuation basis; a final line
gives the figures that would apply if no medical underwriting had been applied
at purchase. Secondly, the main part of the table gives outcomes based on two
possible final redemption dates: 31 December 2012, being the original planned
date, and 31 December 2016, a date chosen for illustrative purposes. Finally,
for each case the effect of sales of any residual portfolio at below valuation
prices is shown. Because a later redemption date of 2016 would involve a lower
proportion of surviving lives, it will be noted that the effect of any reduction
in sale price is much less marked at this date.
+--------------+---------+-----------+-----------+--------+---------+-----------+-----------+---------+---------+
| Variation | LE | IRR based on growth in NAV per share5 |
| in | change | |
| mortality |(years) | |
| 1 | 2 | |
+ + +--------------------------------------------------------------------------------------+
| | | 31 December 2012 | 31 December 2016 |
+ + +------------------------------------------+-------------------------------------------+
| | | Policies |Remaining |100% 6 | 70% 7 | Policies |Remaining | 100% 6 | 70% 7 |
| | |surviving |Shares in | | |surviving |Shares in | | |
| | | 3 | force 4 | | | 3 | force 4 | | |
+--------------+---------+-----------+-----------+--------+---------+-----------+-----------+---------+---------+
| 125% | -1.09 | 53.0% | 61.4% |14.42% | 2.81% | 20.7% | 14.6% | 14.07% | 8.66% |
+--------------+---------+-----------+-----------+--------+---------+-----------+-----------+---------+---------+
| 110% | -0.48 | 56.9% | 72.7% |12.15% | 0.77% | 24.4% | 21.0% | 11.13% | 5.85% |
+--------------+---------+-----------+-----------+--------+---------+-----------+-----------+---------+---------+
| 100% | 0 | 59.7% | 78.8% |10.48% | -0.73% | 27.3% | 26.2% | 9.16% | 3.97% |
+--------------+---------+-----------+-----------+--------+---------+-----------+-----------+---------+---------+
| 80% | 1.2 | 65.8% | 100.0% | 6.71% | -4.12% | 34.4% | 45.2% | 5.05% | 0.06% |
+--------------+---------+-----------+-----------+--------+---------+-----------+-----------+---------+---------+
| 50% | 4.12 | 76.4% | 100.0% |-0.56% |-10.65% | 49.5% | 100.0% | -2.26% | -6.90% |
+--------------+---------+-----------+-----------+--------+---------+-----------+-----------+---------+---------+
| 30% | 8 | 84.9% | 100.0% |-7.15% |-16.57% | 64.1% | 100.0% |-13.83% |-17.92% |
+--------------+---------+-----------+-----------+--------+---------+-----------+-----------+---------+---------+
| Ignore | n/a | 61.9% | 86.3% | 8.77% | -2.26% | 26.8% | 25.2% | 9.53% | 4.33% |
| Medical | | | | | | | | | |
|Underwriting | | | | | | | | | |
| 8 | | | | | | | | | |
+--------------+---------+-----------+-----------+--------+---------+-----------+-----------+---------+---------+
Notes:
1. The central case (100%) assumes that claim experience matches the valuation
basis in force at 31 August 2009. The other scenarios assume that the mortality
experience is higher (e.g.110% means that if one expects 10 deaths, one instead
experiences 11) or lower (e.g. 80% means that if one expects 10 deaths, one
instead experiences 8).
2. This shows the effect of the mortality experience on the life expectancy (in
years) for an otherwise normal 80-year-old non-smoker.
3. The proportion of policies surviving to the specified date based on the
portfolio as at 31 August 2009. No allowance has been made for the policies that
have matured after this date.
4. The model assumes that shares are repurchased whenever excess cash beyond that
required for premium reserves is available. This column represents the number of
shares still in force and not repurchased at the relevant date.
5. This shows how the return varies for a shareholder holding the shares between 31
August 2009 and the relevant date (31 December 2012 or 31 December 2016) based
on the growth in the NAV per share.
6. Return based on growth in NAV per share assuming valuation at the relevant date
using the valuation basis in force at 31 August 2009.
7. Return based on winding up at the relevant date assuming that the net realised
proceeds of assets is 70% of the valuation calculated in accordance with the
valuation basis in force at 31 August 2009.
8. Mortality outcome assuming the lives are all "normal" lives from the point of
view of mortality expectations and ignoring the implied relative health from
medical underwriting.
Credit 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 99%
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 for some
time.
Gearing
As at 31 August 2009, US dollar borrowings under the Allied Irish Banks plc
("AIB") facility were $33.4 million, an increase of $5.2 million since 30 June
2008; sterling borrowings of GBP750,000 as at 30 June 2008 have been repaid.
Consequent on Wells Fargo Bank's acknowledgement of the Company's residence in
the UK for tax purposes, a total of $7.6 million has been received as at the
date of this report in respect of policies which had matured prior to 31 August
2009 but for which proceeds had not been obtained at the period end date. Since
31 August 2009, the Company has been able to make a net repayment to AIB of $6.1
million. As a result, borrowings currently stand at approximately $27.3 million
and are expected to fall further. The Board is currently renegotiating a new
facility agreement with AIB.
Hedging
The Board has considered the Company's hedging policy and after having carried
out an extensive review has concluded that the hedging policy remains
appropriate. Thus there has been no change in the hedging policy of the Company,
which is to hedge into sterling the Company's current net dollar assets.
CPG Tracy
Chairman
18 December 2009
INVESTMENT MANAGER'S REVIEW
For the period from 1 July 2008 to 31 August 2009
Portfolio Overview
During the 14 month period from 1 July 2008 to 31 August 2009, there were seven
confirmed policy maturities and one policy sale. As of 31 August 2009, 139
policies remained within the Fund's portfolio secured on 118 individual lives.
The seven matured policies related to six lives assured: one of which was a
woman and the remaining five were men. Proceeds totalled c. $15 million for the
period.
Cumulatively, as at 31 August 2009 there had been 22 policy maturities with
respect to 16 lives since inception. Proceeds from all maturities have totalled
$28 million, realising a net gain of $15.3 million. One policy has been sold
since inception, generating proceeds of $550,000.
Three further maturities have been confirmed since 31 August 2009, affecting
three policies with a total death benefit of $7.6 million. Please note that the
portfolio statistics below are representative of the portfolio as at 31 August
2009 and as such do not reflect these more recent maturities.
Portfolio Summary
+------------------------------------------+------------------------------------------+
| Net Death Benefits | $228m |
+------------------------------------------+------------------------------------------+
| Male/Female Ratio | 64.8%/35.2% |
+------------------------------------------+------------------------------------------+
| Total number of Holding Life Companies | 34 |
+------------------------------------------+------------------------------------------+
| | |
+------------------------------------------+------------------------------------------+
| Face Weighted Averages | |
+------------------------------------------+------------------------------------------+
| Age at purchase | 82.3 years |
+------------------------------------------+------------------------------------------+
| Age at valuation | 86.3 years |
+------------------------------------------+------------------------------------------+
| Pricing Life Expectancy at purchase | 7.6 years |
+------------------------------------------+------------------------------------------+
| Current Life Expectancy | 5.3 years |
+------------------------------------------+------------------------------------------+
Life Group (Parent Company) Distribution (Top 5)
+-------------------+------------------------------+------------------+-----------+
| Ranking by | Parent Company | % Total Net | % Total |
| Valuation % | | Death Benefit | Valuation |
+-------------------+------------------------------+------------------+-----------+
| 1 | Lincoln Financial Group | 18.7% | 15.3% |
+-------------------+------------------------------+------------------+-----------+
| 2 | AIG Life Group | 15.8% | 14.9% |
+-------------------+------------------------------+------------------+-----------+
| 3 | AEGON USA Group | 12.3% | 12.5% |
+-------------------+------------------------------+------------------+-----------+
| 4 | MassMutual Financial Group | 8.8% | 10.3% |
+-------------------+------------------------------+------------------+-----------+
| 5 | Manulife Financial Group | 8.6% | 8.6% |
+-------------------+------------------------------+------------------+-----------+
Credit Quality Distribution by Holding Life Company
+----------------------------+----------------------------+----------------------------+
| AM Best Rating | % Total Net Death Benefit | % Total Valuation |
+----------------------------+----------------------------+----------------------------+
| A++ | 12.2% | 13.3% |
+----------------------------+----------------------------+----------------------------+
| A+ | 47.9% | 45.8% |
+----------------------------+----------------------------+----------------------------+
| A | 39.7% | 40.7% |
+----------------------------+----------------------------+----------------------------+
| A- | 0.1% | 0.1% |
+----------------------------+----------------------------+----------------------------+
| B++ | 0.1% | 0.1% |
+----------------------------+----------------------------+----------------------------+
| Total | 100.0% | 100.0% |
+----------------------------+----------------------------+----------------------------+
Premium Payments
Premium payments remain the largest expense of the Fund. The expected cost of
premiums for the ten months to 30 June 2010 is approximately $7.6 million. SL
Investment Management Limited has continued the ongoing review of all policy
statements to identify any scope for further optimisation of the premium payment
schedules.
Outlook
As reported on previous occasions, SL Investment Management Limited continues to
see considerable interest from investors looking to diversify from the
traditional markets. Unfortunately this interest has not translated into
significant investment flows and whilst the market as a whole is showing signs
of increased activity with assets again changing hands, prices have yet to
recover to a level where asset sales are in the interests of shareholders.
After the rebasing of life expectancy underwriting during 2008, life expectancy
assessment bases have stabilised with no major revisions by the independent
underwriting firms taking place over the quarter. A rolling programme of
updating the life expectancies in the portfolio is now in effect and the impact
of updated assessments is being incorporated into the value of the policies.
SL Investment Management Limited
18 December 2009
MANAGER'S REVIEW
For the period from 1 July 2008 to 31 August 2009
Cash Management and Borrowings
In March the Company renegotiated the borrowing arrangement with Allied Irish
Banks plc ("AIB"). There are two elements, both expiring in March 2010. The
first part is an amortising term loan facility of $28 million and the second
part is a revolving credit facility ("RCF") of $10 million. As of 31 August
2009, the outstanding balances were $28 million under the amortising term loan
facility and $5.447 million under the RCF.
Subsequent to the period end, the Company made repayments from the proceeds of
maturing policies and reduced overall borrowing. In January 2010, when the loan
facility with AIB is expected to be replaced with a new facility, the Board
expects that, assuming no further maturities, total borrowing will have fallen
to c.$25 million.
The primary covenant currently in place requires the Company to maintain cover
(i.e. asset value, subject to certain adjustments, divided by borrowing) above
2½ times. As at 31 August 2009 cover was 3 times, and this will rise with the
repayment of debt referred to above.
Currency Hedging
The Company hedges its US dollar exposure by means of forward sales of US
dollars. As at 31 August 2009 the outstanding position was the sale of $78.5
million and the purchase of $7.5 million for 30 March 2012. This did not reflect
any significant anticipation of profits over that time.
The unrealised loss on these positions amounted to GBP5,720,617, and once the
unrealised FX profit on the underlying policies, denominated in US dollars, is
taken into account, there was a total unrealised net loss on the Company's FX
positions equivalent to 2.7 pence per share.
Investment Holdings
On 17 September 2009 the Company bought GBP100,000 nominal of the UK Treasury 4%
2016 gilt at a clean price of 105.43 pence. The purpose of this was to generate
eligible securities income, so that the Company may, in due course, be approved
as a UK Investment Trust Company within the meaning of the Taxes Act.
RCM (UK) Limited
18 December 2009
DIRECTORS' REPORT
For the period from 1 July 2008 to 31 August 2009
The Directors have pleasure in submitting their Annual Report and the Audited
Financial Statements for the period from 1 July 2008 to 31 August 2009.
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 Main Market and traded 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 revenue deficit for the period
amounting to GBP1,524,889 (2008: revenue deficit for the year GBP1,461,054)
which has been transferred to revenue reserves. There was a capital return for
the period amounting to GBP213,780 (2008: capital deficit for the year
GBP7,290,985) which has been transferred to capital reserves. The Directors have
not paid an interim dividend (2008: nil) and do not propose the payment of a
final dividend for the year (2008: nil).
Assets
At the period end the net assets attributable to the Shares were GBP37,064,596
(2008:GBP38,375,705). Based on this figure the net asset value of a Share in the
Fund was 92.7p (2008: 95.9p).
Share capital
During the period no Shares were issued or were repurchased.
Substantial shareholdings in the Fund
As at the date of this report, the following companies had declared a notifiable
interest in the Company's voting rights:
+------+-------+------------+-----------+---+---+-------------+--+---------------+
| | | | | | | Shares held | | Percentage |
| | | | | | | | | held |
+------+-------+------------+-----------+---+---+-------------+--+---------------+
| | | | | | | | | % |
+------+-------+------------+-----------+---+---+-------------+--+---------------+
| Investec Asset Management Limited | | | 8,009,000 | | 20.02 |
+---------------------------------------+---+---+-------------+--+---------------+
| Rensburg Sheppards Investment Management Ltd | 2,364,500 | | 5.91 |
+-----------------------------------------------+-------------+--+---------------+
| Rathbone Brothers PLC | | | | 2,096,000 | | 5.24 |
+---------------------------+-----------+---+---+-------------+--+---------------+
| Premier Fund Managers Limited | | | 1,975,000 | | 4.94 |
+------+-------+------------+-----------+---+---+-------------+--+---------------+
At the date of approval of this report, there has been no other notifiable
interest in the Company's voting rights reported to the Company.
Crest registration
Shareholders may hold Shares in either certificated or uncertificated form.
Directors
The Directors serving on the Board during the period, together with their
beneficial interests and those of their families at 31 August 2009, were as
follows:
+-----+-------+----------------------------+--------------+--+---------------+
| | | | Shares | | Shares |
+-----+-------+----------------------------+--------------+--+---------------+
| | | | 31 | | 30 June |
| | | | August 2009 | | 2008 |
+-----+-------+----------------------------+--------------+--+---------------+
| | | | | | |
+-----+-------+----------------------------+--------------+--+---------------+
| CPG Tracy (Chairman) | - | | - |
+------------------------------------------+--------------+--+---------------+
| IA Morris | | * 5,000 | | 5,000 |
+-------------+----------------------------+--------------+--+---------------+
| DIW | | 42,000 | | 32,000 |
| Reynolds | | | | |
+-------------+----------------------------+--------------+--+---------------+
| CW Sherwell | | * 17,500 | | 17,500 |
| | | | | |
+-----+-------+----------------------------+--------------+--+---------------+
* At the date of retirement on 28 August 2009.
The Company has no formal service contracts with the Directors.
I A Morris and C W Sherwell resigned as Directors on 28 August 2009 following
the Extraordinary General Meeting approving the proposal to move the Company's
management and control to the UK.
S M Zein was appointed a Director on 1 September 2009. J P H S Scott was
appointed a Director on 22 October 2009. Neither Mr Zein nor Mr Scott held any
shares in the Company on their dates of appointment.
Corporate Governance
Currently, the UK Listing Authority only requires UK listed companies to
disclose how they have applied the principles and complied with the provisions
of the Combined Code on Corporate Governance (the "Code"). However, the
Financial Services Authority has released Policy Statement and Consultation
Paper CP09/24 titled "Listing regime review" under which it will require all
overseas companies with a "Premium listing" (which includes the Company) to
"comply or explain" against the Code. The changes will be implemented by
amendments to the requirement in Listing Rule 9.8.7R, but the transitional
provisions mean that existing overseas Premium listed companies, such as the
Company, will only have to comply with this rule in financial years beginning
after 31 December 2009.
Moreover, the obligations under the EU Company Reporting Directive which are
implemented by Disclosure and Transparency Rule 7.2, and which currently only
apply to UK companies, will apply to all issuers of equities from 6 April 2010.
Under this rule, a company must (i) make a corporate governance statement in its
annual report and accounts based on the code to which it is subject, or with
which it voluntarily complies and (ii) describe its internal control and risk
management arrangements.
Although the Company is not incorporated in the United Kingdom, 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 the Code:-
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 overseen 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 Code. 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 must retire and offer themselves for
re-appointment at each subsequent annual general meeting.
The Board reviewed its performance and composition during the period, 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 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. Chairman of the
Audit Committee was C W Sherwell until 28 August 2009. D I W Reynolds was
appointed his successor on the same date.
The Board is responsible for establishing, maintaining and monitoring the
effectiveness of the Company'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 SL Investment Management Limited
(formerly 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 Bank plc acts as sub-custodian.
Kleinwort Benson (Channel Islands) Fund Services Limited are contracted to
provide the Company's administration and accounting functions and Capita IRG
(CI) Limited its registration function. Since 1 September 2009 the secretarial
function has been carried out by RCM (UK) Limited.
The Board reviews regularly the performance of the services provided by these
companies. A summary of the terms of the agreements with SL Investment
Management Limited and RCM (UK) Limited are set out in note 4 to the financial
statements. After due consideration of the resources and reputation of SL
Investment Management Limited and RCM (UK) Limited, the Board believe it is in
the interests of shareholders to retain the services of both SL Investment
Management 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. The Board as a whole fulfils the
function of the Remuneration Committee and carries out periodic reviews of
Directors' fees and makes recommendations on fee levels to the Board.
The emoluments of the Directors for the period were as follows:
+------+-------+------------+-----------+---+-----------------+---+--------------+
| | | | | | Period to | | Year to |
| | | | | | 31 August 2009 | | 30 June 2008 |
+------+-------+------------+-----------+---+-----------------+---+--------------+
| | | | | | GBP | | GBP |
+------+-------+------------+-----------+---+-----------------+---+--------------+
| | | | | | | | |
+------+-------+------------+-----------+---+-----------------+---+--------------+
| CPG Tracy (Chairman) | | | 14,583 | | 12,491 |
+---------------------------+-----------+---+-----------------+---+--------------+
| IA Morris | | | | 11,667 | | 9,993 |
+--------------+------------+-----------+---+-----------------+---+--------------+
| DIW Reynolds | | | | 11,667 | | 9,993 |
| | | | | | | |
+--------------+------------+-----------+---+-----------------+---+--------------+
| CW Sherwell | | | | 11,667 | | 9,993 |
+--------------+------------+-----------+---+-----------------+---+--------------+
| | | | | | | | |
+------+-------+------------+-----------+---+-----------------+---+--------------+
| | | | | | 49,584 | | 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.
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, 2008. They have general
responsibility for taking such steps as are 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
The Board considered carefully the issue of 'going concern', specifically in
relation to the availability of funding. It was noted that as at the Board
meeting date of 7 December 2009, borrowings under the Allied Irish Banks plc
("AIB") facility had reduced to $29.3 million out of a total facility of $38
million and that, with the proceeds of maturities due, this should fall further,
so that at the time of re-negotiation of the facility in early 2010, borrowings
should be around $25 million, having fallen from a peak of $35.4 million. This
would mean that the margin of cover would be well above the facility minimum. On
this basis, and on the basis of early discussions with AIB, the Board is
confident that the facilities will be renegotiated successfully. It is intended
to agree a total, twelve month facility in the region of $35m to allow for
negative cash flow arising from a mis-match of premium outflow and maturities
inflow.
The Board further considered the position if for some reason it was unable to
negotiate an extension to its facilities and was unable to secure an alternative
source of finance. Acknowledging that this might require sales of policies in a
poor market, the Board was nevertheless confident that, given the margin of
cover, sales could be achieved to cover outstanding borrowings, albeit that
prices would probably not match those shown in the valuation. This would
obviously affect the net asset value of the Company, but the business would
remain a going concern even on this extreme assumption, and therefore the
financial statements have been prepared on the going concern basis.
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 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 has decided
not to establish a Remuneration and Management Engagement Committee as these
functions are carried out by the Board. This includes an annual review of the
contracts with the Manager and the Investment Manager and whether they are in
the best interests of shareholders.
It is the opinion of the Directors that the continuing appointment of the
Manager on the terms agreed is in the interests of the Company's shareholders as
a whole. The main reasons for this opinion are the extensive investment
management resources of the Manager and its experience in managing and
administering investment trust companies.
It is also the opinion of the Directors that the continuing appointment of the
Investment Manager on the terms agreed is in the interests of the Company's
shareholders as a whole. The main reasons for this opinion are their extensive
knowledge of the US traded life interest market and their valuation together
with the complex financial and investment modelling related thereto.
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 period 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 Company's financial instruments comprise investments, cash and various items
such as debtors, creditors etc that arise directly from the Company's
operations. The main purpose of these instruments is the investment of
Shareholders' funds.
Note 18 to the financial statements 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 LLP as auditors will be proposed at the next
Annual General Meeting.
At the date of approval of the financial statements the Directors confirm that:
* so far as the Directors are aware, there is no relevant audit information of
which the Company's auditor is unaware; and
* the Directors have taken all steps they ought to have taken as Directors to make
themselves aware of any relevant audit information and to establish that the
Company's auditor is aware of that information.
This confirmation is given and should be interpreted in accordance with the
provisions of Section 249 of The Companies (Guernsey) Law, 2008.
By order of the Board.
CPG Tracy DIW Reynolds
Director Director
18 December 2009
DIRECTORS' RESPONSIBILITIES
For the period from 1 July 2008 to 31 August 2009
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; 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, 2008. 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 the 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 DIW Reynolds
Director Director
18 December 2009
INDEPENDENT AUDITORS' REPORT
For the period from 1 July 2008 to 31 August 2009
We have audited the financial statements of Alternative Asset Opportunities PCC
Limited for the period 1 July 2008 to 31 August 2009 which comprises the Income
Statement, the Balance Sheet, the Statement of Changes in Redeemable
Participating Preference Shareholders' Funds, the Cash Flow Statement, the
Portfolio Statement and the related notes 1 to 20.
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 262 of The Companies (Guernsey) Law, 2008. 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 and
International Standards on Auditing (UK and Ireland).
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, 2008. 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 31 August 2009 and of its
total loss for the period ended on that date and have been properly prepared in
accordance with The Companies (Guernsey) Law, 2008.
Emphasis of matter
In forming our opinion on the financial statements, which is not qualified;
* We draw attention to note 2 of the financial statements concerning the Company's
actuarial valuation model applied to 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. The methodology also assumes
the Fund is a going concern and note 2 to the financial statements highlights
that this valuation may differ from the realisable value of these investments.
* Note 2 (c) notes that the Fund is currently renegotiating its borrowing
facilities. The Directors note that were they to be unsuccessful and the Fund
had to pay back its borrowings, the Directors are confident this could be
achieved through sales of TLIs. However, the sales proceeds would probably not
match the prices shown in the valuation.
It is not possible to quantify the effects of these uncertainties on the
financial statements.
Deloitte LLP
Chartered Accountants
St Peter Port
Guernsey
18 December 2009
INCOME STATEMENT
For the period from 1 July 2008 to 31 August 2009
+----------------+------+--+-------+-------------+--------------+--------------+--+-------------+-------------+-------------+
| | | | Notes | Period from 1 July 2008 | | Year ended 30 June 2008 |
| | | | | to 31 August 2009 | | |
+----------------+------+--+-------+-------------------------------------------+--+-----------------------------------------+
| | | | | Revenue | Capital | Total | | Revenue | Capital | Total |
+----------------+------+--+-------+-------------+--------------+--------------+--+-------------+-------------+-------------+
| | | | | GBP | GBP | GBP | | GBP | GBP | GBP |
+----------------+------+--+-------+-------------+--------------+--------------+--+-------------+-------------+-------------+
| | | | | | | | | | | |
+----------------+------+--+-------+-------------+--------------+--------------+--+-------------+-------------+-------------+
| Operating income | | | | | | | | | |
+-----------------------+--+-------+-------------+--------------+--------------+--+-------------+-------------+-------------+
| Net gain/(loss) on | | 9 | - | 10,484,688 | 10,484,688 | | - | (5,594,955) | (5,594,955) |
| investments | | | | | | | | | |
+-----------------------+--+-------+-------------+--------------+--------------+--+-------------+-------------+-------------+
| | | | | | | | | | | |
+----------------+------+--+-------+-------------+--------------+--------------+--+-------------+-------------+-------------+
| Other foreign | | 16 | - | (10,270,908) | (10,270,908) | | - | (1,696,030) | (1,696,030) |
| exchange losses | | | | | | | | | |
+-----------------------+--+-------+-------------+--------------+--------------+--+-------------+-------------+-------------+
| | | | | | | | | | | |
+----------------+------+--+-------+-------------+--------------+--------------+--+-------------+-------------+-------------+
| Interest and similar | | 3 | 6,543 | - | 6,543 | | 70,973 | - | 70,973 |
| income | | | | | | | | | |
+-----------------------+--+-------+-------------+--------------+--------------+--+-------------+-------------+-------------+
| | | | | | | | | | | |
+----------------+------+--+-------+-------------+--------------+--------------+--+-------------+-------------+-------------+
| Operating expenses | | | | | | | | | |
+-----------------------+--+-------+-------------+--------------+--------------+--+-------------+-------------+-------------+
| Management fee | | 4 | (197,745) | - | (197,745) | | (236,161) | - | (236,161) |
+-----------------------+--+-------+-------------+--------------+--------------+--+-------------+-------------+-------------+
| Investment manager's fee | 4 | (217,755) | - | (217,755) | | (230,968) | - | (230,968) |
| | | | | | | | | |
+--------------------------+-------+-------------+--------------+--------------+--+-------------+-------------+-------------+
| Custodian fee | | (21,708) | - | (21,708) | | (22,440) | - | (22,440) |
+--------------------------+-------+-------------+--------------+--------------+--+-------------+-------------+-------------+
| Other expenses | 5 | (535,069) | - | (535,069) | | (265,357) | - | (265,357) |
+--------------------------+-------+-------------+--------------+--------------+--+-------------+-------------+-------------+
| | | | | | | | | | | |
+----------------+------+--+-------+-------------+--------------+--------------+--+-------------+-------------+-------------+
| Total operating expenses | | | | | | | |
+----------------------------------+-------------+--------------+--------------+--+-------------+-------------+-------------+
| before | | (972,277) | - | (972,277) | | (754,926) | - | (754,926) |
| finance costs | | | | | | | | |
+--------------------------+-------+-------------+--------------+--------------+--+-------------+-------------+-------------+
| Operating loss before | | | | | | | | |
+--------------------------+-------+-------------+--------------+--------------+--+-------------+-------------+-------------+
| finance costs | | (965,734) | 213,780 | (751,954) | | (683,953) | (7,290,985) | (7,974,938) |
+--------------------------+-------+-------------+--------------+--------------+--+-------------+-------------+-------------+
| | | | | | | | | | | |
+----------------+------+--+-------+-------------+--------------+--------------+--+-------------+-------------+-------------+
| Finance costs | | | | | | | | |
+--------------------------+-------+-------------+--------------+--------------+--+-------------+-------------+-------------+
| Loan interest payable | 13 | (559,155) | - | (559,155) | | (777,101) | - | (777,101) |
+--------------------------+-------+-------------+--------------+--------------+--+-------------+-------------+-------------+
| | | | | | | | | | | |
+----------------+------+--+-------+-------------+--------------+--------------+--+-------------+-------------+-------------+
| Net (deficit)/return | | | (1,524,889) | 213,780 | (1,311,109) | | (1,461,054) | (7,290,985) | (8,752,039) |
+-----------------------+--+-------+-------------+--------------+--------------+--+-------------+-------------+-------------+
| | | | | | | | | | | |
+----------------+------+--+-------+-------------+--------------+--------------+--+-------------+-------------+-------------+
| (Deficit)/return per | 7 | (3.81p) | 0.53p | (3.28p) | | (3.65p) | (18.23p) | (21.88p) |
| redeemable 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.
The notes on pages 27 to 42 are an integral part of these financial statements.
BALANCE SHEET
For the period ended 31 August 2009
+---+-------+----+----+------+-----------------+---------+--+-------------+--+-------------+
| | | | | Notes | | 31 August | | 30 June |
| | | | | | | 2009 | | 2008 |
+---+-------+----------------+-----------------+---------+--+-------------+--+-------------+
| | | | | | | GBP | | GBP |
+---+-------+----------------+-----------------+---------+--+-------------+--+-------------+
| Non-current assets | | | | | |
+----------------------------------------------+---------+--+-------------+--+-------------+
| Financial assets at fair value through | 9 | | 58,253,174 | | 50,895,244 |
| profit or loss | | | | | |
+----------------------------------------------+---------+--+-------------+--+-------------+
| | | | | | | 58,253,174 | | 50,895,244 |
+---+-----------------+------+-----------------+---------+--+-------------+--+-------------+
| | | | | | | | | |
+---+-----------------+------+-----------------+---------+--+-------------+--+-------------+
| Current assets | | | | | | | |
+---------------------+------+-----------------+---------+--+-------------+--+-------------+
| Cash and cash equivalents | | 11 | | 903,849 | | 1,196,096 |
+----------------------------+-----------------+---------+--+-------------+--+-------------+
| Fair value of derivative financial | 9 | | - | | 1,305,132 |
| instruments | | | | | |
+----------------------------------------------+---------+--+-------------+--+-------------+
| Other receivables | | 10 | | 4,621,059 | | 243,501 |
+----------------------------+-----------------+---------+--+-------------+--+-------------+
| | | | | | | | | |
+---+-------+----------------+-----------------+---------+--+-------------+--+-------------+
| | | | | | | 5,524,908 | | 2,744,729 |
+---+-------+----------------+-----------------+---------+--+-------------+--+-------------+
| | | | | | | | | |
+---+-------+----------------+-----------------+---------+--+-------------+--+-------------+
| Total | | | | | 63,778,082 | | 53,639,973 |
| assets | | | | | | | |
+-----------+----------------+-----------------+---------+--+-------------+--+-------------+
| | | | | | | | | |
+---+-------+----------------+-----------------+---------+--+-------------+--+-------------+
| Current liabilities | | | | | | |
+----------------------------+-----------------+---------+--+-------------+--+-------------+
| Loan account | | 13 | | 20,557,471 | | 14,904,495 |
+----------------------------+-----------------+---------+--+-------------+--+-------------+
| Other payables | | 12 | | 435,398 | | 359,773 |
+----------------------------+-----------------+---------+--+-------------+--+-------------+
| Fair value of derivative financial | 9 | | 5,720,617 | | - |
| instruments | | | | | |
+----------------------------------------------+---------+--+-------------+--+-------------+
| | | | | | | | | |
+---+------------+-----------+-----------------+---------+--+-------------+--+-------------+
| Total | | | | | 26,713,486 | | 15,264,268 |
| liabilities | | | | | | | |
+----------------+-----------+-----------------+---------+--+-------------+--+-------------+
| | | | | | | | | |
+---+------------+-----------+-----------------+---------+--+-------------+--+-------------+
| Net assets attributable to redeemable | | | 37,064,596 | | 38,375,705 |
| participating preference shareholders | | | | | |
+----------------------------------------------+---------+--+-------------+--+-------------+
| | | | | | | | | |
+---+-------+----------------+-----------------+---------+--+-------------+--+-------------+
| Redeemable participating preference | | | | | |
| shareholders' funds | | | | | |
+----------------------------------------------+---------+--+-------------+--+-------------+
| Share premium account | | 14 | | 39,168,236 | | 39,168,236 |
+----------------------------+-----------------+---------+--+-------------+--+-------------+
| Reserves | | | 16 | | (2,103,640) | | (792,531) |
+----------------+-----------+-----------------+---------+--+-------------+--+-------------+
| | | | | | | | | |
+---+------------+-----------+-----------------+---------+--+-------------+--+-------------+
| Total equity | | | | | 37,064,596 | | 38,375,705 |
+----------------+-----------+-----------------+---------+--+-------------+--+-------------+
| | | | | | | | | |
+---+------------+-----------+-----------------+---------+--+-------------+--+-------------+
| Net asset value per redeemable participating | 8 | | 92.7p | | 95.9p |
| preference share | | | | | |
+---+-------+----+----+------+-----------------+---------+--+-------------+--+-------------+
These financial statements were approved by the Board of Directors on 18
December 2009.
Signed on behalf of the Board.
CPG Tracy DIW Reynolds
Director Director
18 December 2009
The notes on pages 27 to 42 are an integral part of these financial statements.
STATEMENT OF CHANGES IN PARTICIPATING
PREFERENCE SHAREHOLDER'S FUNDS
FOR THE PERIOD FROM 1 JULY 2008 TO 31 AUGUST 2009
+----+------+----+-----------+-------------+--+------------+--+-------------+--+-------------+
| | | | | Share | | Capital | | Revenue | | |
+----+------+----+-----------+-------------+--+------------+--+-------------+--+-------------+
| | | | | Premium | | reserve | | reserve | | Total |
+----+------+----+-----------+-------------+--+------------+--+-------------+--+-------------+
| For the period from 1 July | GBP | | GBP | | GBP | | GBP |
| 2008 to 31 August 2009 | | | | | | | |
+----------------------------+-------------+--+------------+--+-------------+--+-------------+
| | | | | | | | | | | |
+----+------+----+-----------+-------------+--+------------+--+-------------+--+-------------+
| Balance as at 1 July 2008 | 39,168,236 | | 2,175,113 | | (2,967,644) | |38,375,705 |
+----------------------------+-------------+--+------------+--+-------------+--+-------------+
| | | | | | | | | | | |
+----+------+----+-----------+-------------+--+------------+--+-------------+--+-------------+
| Return/(deficit) for the | - | | 213,780 | | (1,524,889) | |(1,311,109) |
| period | | | | | | | |
+----------------------------+-------------+--+------------+--+-------------+--+-------------+
| | | | | | | | | | | |
+----+------+----+-----------+-------------+--+------------+--+-------------+--+-------------+
| Balance as at 31 August | 39,168,236 | | 2,388,893 | | (4,492,533) | |37,064,596 |
| 2009 | | | | | | | |
+----+------+----+-----------+-------------+--+------------+--+-------------+--+-------------+
+------+------------+--------+-------------+--+-------------+--+-------------+--+-------------+
| | | | Share | | Capital | | Revenue | | |
+------+------------+--------+-------------+--+-------------+--+-------------+--+-------------+
| For the year ended 30 June | Premium | | reserve | | reserve | | Total |
| 2008 | | | | | | | |
+----------------------------+-------------+--+-------------+--+-------------+--+-------------+
| | | | GBP | | GBP | | GBP | | GBP |
+------+------------+--------+-------------+--+-------------+--+-------------+--+-------------+
| | | | | | | | | | |
+------+------------+--------+-------------+--+-------------+--+-------------+--+-------------+
| Balance as at 1 July 2007 | 39,168,236 | | 9,466,098 | | (1,506,590) | |47,127,744 |
+----------------------------+-------------+--+-------------+--+-------------+--+-------------+
| | | | | | | | | | |
+------+------------+--------+-------------+--+-------------+--+-------------+--+-------------+
| Deficit 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 |
+------+------------+--------+-------------+--+-------------+--+-------------+--+-------------+
The notes on pages 27 to 42 are an integral part of these financial statements.
CASH FLOW STATEMENT
For the period from 1 July 2008 to 31 August 2009
+------------+--+--+-----------+---+-----+---------+----------------+--+----------------+
| | | | | | | | Period from | | Year ended |
| | | | | | | | 1 July 2008 | | 30 June |
| | | | | | | | to 31 August | | 2008 |
| | | | | | | | 2009 | | |
+------------+--+--+-----------+---+-----+---------+----------------+--+----------------+
| | | | | | | | GBP | | GBP |
+------------+--+--+-----------+---+-----+---------+----------------+--+----------------+
| Cash flows from operating activities | | | |
+--------------------------------------------------+----------------+--+----------------+
| Revenue account operating loss before finance | (965,734) | | (683,953) |
| costs for the period/year | | | |
+--------------------------------------------------+----------------+--+----------------+
| (Increase)/decrease in other receivables | (4,377,558) | | 844,253 |
+--------------------------------------------------+----------------+--+----------------+
| Increase in other payables | | | | 75,625 | | 107,144 |
+------------------------------+---+-----+---------+----------------+--+----------------+
| Premiums paid | | | | | | (6,459,242) | | (4,490,367) |
+---------------+--+-----------+---+-----+---------+----------------+--+----------------+
| Proceeds from maturity of investments | 9,586,000 | | 1,903,579 |
+--------------------------------------------------+----------------+--+----------------+
| Currency | | | | | | (3,245,159) | | (90,307) |
| losses | | | | | | | | |
+---------------+--+-----------+---+-----+---------+----------------+--+----------------+
| | | | | | | | | | |
+------------+--+--+-----------+---+-----+---------+----------------+--+----------------+
| Net cash outflow from operating activities | (5,386,068) | | (2,409,651) |
| before interest | | | |
+--------------------------------------------------+----------------+--+----------------+
| | | | | | | | | | |
+------------+--+--+-----------+---+-----+---------+----------------+--+----------------+
| Financing | | | | | | | |
| activities | | | | | | | |
+------------------+-----------+---+-----+---------+----------------+--+----------------+
| Increase in loan account | | | 5,652,976 | | 2,459,254 |
+----------------------------------+-----+---------+----------------+--+----------------+
| Interest | | | | | | | (559,155) | | (777,101) |
| Paid | | | | | | | | | |
+------------+--+--+-----------+---+-----+---------+----------------+--+----------------+
| | | | | | | | | | |
+------------+--+--+-----------+---+-----+---------+----------------+--+----------------+
| Net cash inflow from financing activities | 5,093,821 | | 1,682,153 |
+--------------------------------------------------+----------------+--+----------------+
| | | | | | | | | | |
+------------+--+--+-----------+---+-----+---------+----------------+--+----------------+
| | | | | | | | | | |
+------------+--+--+-----------+---+-----+---------+----------------+--+----------------+
| Reconciliation of cash flow to movement in net | | | |
| cash | | | |
+--------------------------------------------------+----------------+--+----------------+
| Decrease in cash and cash equivalents in the | (292,247) | | (727,498) |
| period/year | | | |
+--------------------------------------------------+----------------+--+----------------+
| Cash and cash equivalents at the beginning of | 1,196,096 | | 1,923,594 |
| the period/year | | | |
+--------------------------------------------------+----------------+--+----------------+
| | | | | | | | | | |
+------------+--+--+-----------+---+-----+---------+----------------+--+----------------+
| Cash and cash equivalents at the end of the | 903,849 | | 1,196,096 |
| period/year | | | |
+------------+--+--+-----------+---+-----+---------+----------------+--+----------------+
The notes on pages 27 to 42 are an integral part of these financial statements.
PORTFOLIO OF INVESTMENTS
As at 31 August 2009
+---------+--------+--------+-----------+-------------+--+-------------+--+-----------+--+---------+
| Traded Life Interests ("TLI's") | | | | | | | |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| | | | | | | | | | | |
+---------+--------+--------+-----------+-------------+--+-------------+--+-----------+--+---------+
| Issuer | | | Number | | Investment | | Portion | | AM Best |
| | | | of Policies | | | | of | | Rating |
| | | | | | | | Portfolio | | |
+------------------+--------+-----------+-------------+--+-------------+--+-----------+--+---------+
| | | | | | | GBP | | % | | |
+---------+--------+--------+-----------+-------------+--+-------------+--+-----------+--+---------+
| | | | | | | | | | | |
+---------+--------+--------+-----------+-------------+--+-------------+--+-----------+--+---------+
| American General Life Insurance | 13 | | 8,685,291 | | 14.8% | | A |
| Company | | | | | | | |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| Lincoln National Life Insurance | 19 | | 8,089,438 | | 13.8% | | A+ |
| Company | | | | | | | |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| Transamerica Life Insurance Company | 21 | | 7,011,606 | | 12.0% | | A |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| Massachusetts Mutual Life Insurance | 10 | | 5,982,732 | | 10.3% | | A++ |
| Company | | | | | | | |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| Pacific Life Insurance Company | 6 | | 4,062,418 | | 7.0% | | A+ |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| Aviva Life and Annuity Company | 6 | | 3,519,696 | | 6.0% | | A |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| John Hancock Life Insurance Company | 11 | | 3,485,547 | | 6.0% | | A+ |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| Jackson National Life Insurance | 1 | | 2,243,280 | | 3.9% | | A+ |
| Company | | | | | | | |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| MetLife Insurance Company of | 8 | | 2,186,670 | | 3.8% | | A+ |
| Connecticut | | | | | | | |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| New York Life Insurance and Annuity | 6 | | 1,772,680 | | 3.0% | | A++ |
| Corp | | | | | | | |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| Security Life of Denver Insurance | 1 | | 1,670,697 | | 2.9% | | A |
| Company | | | | | | | |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| John Hancock Variable Life Insurance | 3 | | 1,529,317 | | 2.6% | | A+ |
| Company | | | | | | | |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| Columbus Life Insurance Company | 2 | | 1,018,951 | | 1.7% | | A+ |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| National Western Life Insurance | 1 | | 832,596 | | 1.4% | | A |
| Company | | | | | | | |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| AXA Equitable Life Insurance Company | 4 | | 825,623 | | 1.4% | | A+ |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| Lincoln Life & Annuity Company of NY | 2 | | 818,756 | | 1.4% | | A+ |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| MONY Life Insurance Company | 1 | | 732,239 | | 1.3% | | A+ |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| Genworth Life Insurance Company | 1 | | 577,240 | | 1.0% | | A |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| Aviva Life and Annuity Company of NY | 2 | | 384,709 | | 0.7% | | A |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| North American Company for L & H Ins | 2 | | 378,799 | | 0.7% | | A+ |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| Lincoln Benefit Life | | 1 | | 368,076 | | 0.6% | | A+ |
| Company | | | | | | | | |
+---------------------------+-----------+-------------+--+-------------+--+-----------+--+---------+
| Transamerica Financial Life Insurance | 1 | | 296,247 | | 0.5% | | A |
| Company | | | | | | | |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| United of Omaha Life Insurance | 2 | | 275,581 | | 0.5% | | A+ |
| Company | | | | | | | |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| Sun Life Assurance Company of CA | 2 | | 223,776 | | 0.4% | | A+ |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| ReliaStar Life Insurance Company | 2 | | 223,067 | | 0.4% | | A |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| Banner Life Insurance Company | 2 | | 206,224 | | 0.4% | | A+ |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| MONY Life Insurance Company of | 1 | | 177,210 | | 0.3% | | A+ |
| America | | | | | | | |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| ING Life Insurance and Annuity | 2 | | 175,479 | | 0.3% | | A |
| Company | | | | | | | |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| Standard Insurance Company | 1 | | 138,609 | | 0.2% | | A |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| Reassure America Life Insurance | 1 | | 123,247 | | 0.2% | | A |
| Company | | | | | | | |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| Security Mutual Life Insurance | 1 | | 94,982 | | 0.2% | | A |
| Company of NY | | | | | | | |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| General American Life Insurance | 1 | | 54,960 | | 0.1% | | A+ |
| Company | | | | | | | |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| Phoenix Life Insurance Company | 1 | | 54,924 | | 0.1% | | B++ |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| Beneficial Life Insurance Company | 1 | | 32,507 | | 0.1% | | A- |
+---------------------------------------+-------------+--+-------------+--+-----------+--+---------+
| | | | | | | | | | | |
+---------+--------+--------+-----------+-------------+--+-------------+--+-----------+--+---------+
| | | | | | | 58,253,174 | | 100.0% | | |
+---------+--------+--------+-----------+-------------+--+-------------+--+-----------+--+---------+
NOTES TO THE FINANCIAL STATEMENTS
For the period from 1 July 2008 to 31 August 2009
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 Company 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
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.
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
Standards and Interpretations were 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.
IAS 23: Borrowing Costs (effective for annual periods beginning on or after 1
January 2009).
IAS 27: Consolidated and Separate Financial Statements (effective for annual
periods beginning on or after 1 July 2009).
IAS 39: (Amendment) Financial Instruments: Recognition and Measurement
(effective for annual periods beginning on or after 1 January 2009).
IFRS 7: (Amendment) Disclosures (effective for annual periods beginning on or
after 1 January 2009).
IFRS 8: Operating Segments (effective for annual periods beginning on or after 1
January 2009).
IFRS 9: Financial Instruments: Recognition and Measurement (effective for annual
periods beginning 1 January 2013) (issued but not adopted by the European
Union).
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 and Venture Capital Trusts' (SORP)
issued in January 2009 by the Association of Investment Companies.
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 GBP1 each fully paid represented by cash at bank. As they are
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
held 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 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 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 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 that this valuation
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) Going concern
The Board considered carefully the issue of 'going concern', specifically in
relation to the availability of funding. It was noted that as at the Board
meeting date of 7 December 2009, borrowings under the AIB facility had reduced
to $29.3 million out of a total facility of $38 million and that, with the
proceeds of maturities due, this should fall further, so that at the time of
re-negotiation of the facility in early 2010, borrowings should be around $25
million, having fallen from a peak of $35.4 million. This would mean that the
margin of cover would be well above the facility minimum. On this basis, and on
the basis of early discussions with AIB, the Board is confident that the
facilities will be renegotiated successfully. It is intended to agree a total,
twelve month facility in the region of $35m to allow for negative cash flow
arising from a mis-match of premium outflow and maturities inflow.
The Board further considered the position if for some reason it was unable to
negotiate an extension to its facilities and was unable to secure an alternative
source of finance. Acknowledging that this might require sales of policies in a
poor market, the Board was nevertheless confident that, given the margin of
cover, sales could be achieved to cover outstanding borrowings, albeit that
prices would probably not match those shown in the valuation. This would
obviously affect the net asset value of the Company, but the business would
remain a going concern even on this extreme assumption, and therefore the
financial statements have been prepared on the going concern basis.
(d) Interest income
Bank deposit interest is accounted for on an accruals basis.
(e)Expenses
Expenses are accounted for on an accruals basis and all amounts have been
allocated to the income statement - revenue account.
(f)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.
(g)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 period end rate. Realised and unrealised gains are included
in the Income Statement and in the capital reserve - realised, and capital
reserve - unrealised respectively.
(h)Bank borrowings
Interest bearing bank loans and overdrafts are recorded when the proceeds are
received. Interest payments are recognised in the Statement of Comprehensive
Income in the year in which they are incurred.
3 Income
+-------+-----------+----------------+---------------+--+--------------+
| | | Period from 1 July 2008 | | Year ended |
+-------+-----------+--------------------------------+--+--------------+
| | | | to 31 August | | 30 June 2008 |
| | | | 2009 | | |
+-------+-----------+----------------+---------------+--+--------------+
| | | | GBP | | GBP |
+-------+-----------+----------------+---------------+--+--------------+
| Bank deposit | | 6,543 | | 70,973 |
| interest | | | | |
+-------------------+----------------+---------------+--+--------------+
| | | | | | |
+-------+-----------+----------------+---------------+--+--------------+
| Total income | 6,543 | | 70,973 |
+-------+-----------+----------------+---------------+--+--------------+
4 Investment management and management fees
SL Investment Management Limited (formerly Surrenda-link Limited), the
Investment Manager, was appointed under 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.
From 1 September 2009 the fee payable to the Investment Manager was reduced to
0.475% per annum of the Company's Net Asset Value. With effect from 1 April 2012
the fee will be reduced to 0.4% per annum of the Company's Net Asset Value.
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 placees and other authorised
intermediaries.
From 1 September 2009 the fee payable to the Manager was reduced to 0.425% per
annum of the Company's Net Asset Value. With effect from 1 April 2012 the fee
will be reduced to 0.4% per annum of the Company's Net Asset Value. With effect
from 1 September 2009 a separate Agreement was signed between the Company and
the Manager for the provision of Administration and Secretarial Services at a
fixed fee of GBP20,000 per annum.
5 Other expenses
+----------+------------+-----------+---+----------------+--+---------------+
| | | | Period from 1 July | | Year ended |
| | | | 2008 | | |
+----------+------------+-----------+--------------------+--+---------------+
| | | | | to 31 August | | 30 June 2008 |
| | | | | 2009 | | |
+----------+------------+-----------+---+----------------+--+---------------+
| | | | | GBP | | GBP |
+----------+------------+-----------+---+----------------+--+---------------+
| Administration and accountancy | | 45,594 | | 52,736 |
| fees | | | | |
+-----------------------------------+---+----------------+--+---------------+
| Broker fees | | | 29,344 | | 24,308 |
+-----------------------+-----------+---+----------------+--+---------------+
| Directors' fees and expenses | | 50,993 | | 43,774 |
+-----------------------------------+---+----------------+--+---------------+
| D&O Insurance | | | 12,408 | | 8,959 |
+-----------------------+-----------+---+----------------+--+---------------+
| Auditors' | | | 31,249 | | 24,432 |
| remuneration | | | | | |
+-----------------------+-----------+---+----------------+--+---------------+
| Legal fees | | | 203,370 | | 15,083 |
+-----------------------+-----------+---+----------------+--+---------------+
| Printing | | | | 5,089 | | 1,033 |
+----------+------------+-----------+---+----------------+--+---------------+
| Safe custody fees | | | 15,277 | | 8,362 |
+-----------------------+-----------+---+----------------+--+---------------+
| Bank fees and | | | 58,484 | | 29,471 |
| charges | | | | | |
+-----------------------+-----------+---+----------------+--+---------------+
| Sundry expenses * | | | 83,261 | | 57,199 |
+-----------------------+-----------+---+----------------+--+---------------+
| | | | | | | |
+----------+------------+-----------+---+----------------+--+---------------+
| | | | | 535,069 | | 265,357 |
+----------+------------+-----------+---+----------------+--+---------------+
* Sundry expenses include mailing services, tax exempt fees, registrar fees,
stock exchange fees and other sundry costs.
6 Taxation
The Company is exempt from Guernsey Income Tax under the Income Tax (Exempt
Bodies) (Guernsey) Ordinance 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.
Following an Extraordinary General Meeting on 28 August 2009, it was resolved
that the Company would adopt UK tax residency from 1 September 2009 onwards.
Since that date the Company has been managed in such a way as to meet the
conditions for approval in due course as an investment trust under Section 842
of the Income and Corporation Taxes Act 1988 in respect of the accounting period
commencing on 1 September 2009. The reason for this resolution is disclosed in
note 20.
7 Return per share
Revenue deficit per Share is based on the net deficit attributable to the Shares
of GBP1,524,889 (2008: deficit GBP1,461,054) and on the average number of Shares
in issue of 40,000,000. Capital return per Share is based on the net capital
return attributable to the Shares of GBP213,780 (2008: deficit GBP7,290,985) 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 GBP37,064,596 (2008: GBP38,375,705) and on the
40,000,000 Shares in issue at the period end.
9 Investments
+----------+-----------+-------------+---+--------------+-----------+--------------+---+--------------+--+--------------+
| (a) Categories of investments | | |
+----------------------------------------------------------------------------------+---+--------------------------------+
| | | | | As at 31 August 2009 | | As at 30 June 2008 |
+----------+-----------+-------------+---+-----------------------------------------+---+--------------------------------+
| | | | | | | % of net | | | | % of net |
| | | | | | | assets | | | | assets |
+----------+-----------+-------------+---+--------------+-----------+--------------+---+--------------+--+--------------+
| | | | | Fair | | attributable | | Fair | | attributable |
| | | | | value | | to | | value | | to |
| | | | | | | Shareholders | | | | Shareholders |
+----------+-----------+-------------+---+--------------+-----------+--------------+---+--------------+--+--------------+
| | | | | GBP | | | | GBP | | |
+----------+-----------+-------------+---+--------------+-----------+--------------+---+--------------+--+--------------+
| Financial assets/(liabilities) at fair | | | | | | | |
| value through profit or loss: | | | | | | | |
+ +--------------+-----------+--------------+---+--------------+--+--------------+
| | | | | | | | |
+----------------------------------------+--------------+-----------+--------------+---+--------------+--+--------------+
| TLI policies | | | 58,253,174 | | 157.17% | | 50,895,244 | | 132.62% |
+----------------------+-------------+---+--------------+-----------+--------------+---+--------------+--+--------------+
| Derivative financial instrument | | (5,720,617) | | (15.43)% | | 1,305,132 | | 3.40% |
+------------------------------------+---+--------------+-----------+--------------+---+--------------+--+--------------+
| Net current liabilities | | (15,467,961) | | (41.74)% | | (13,824,671) | | (36.02)% |
+------------------------------------+---+--------------+-----------+--------------+---+--------------+--+--------------+
| | | | | | | | | | | |
+----------+-----------+-------------+---+--------------+-----------+--------------+---+--------------+--+--------------+
| | | | | 37,064,596 | | 100% | | 38,375,705 | | 100% |
+----------+-----------+-------------+---+--------------+-----------+--------------+---+--------------+--+--------------+
+--------------+----------+-------------+----+--+--+--+---------------+--------------+--+-------------+
| (b) Investments at fair value through profit or loss | Period from | | Year ended |
| | 1 July 2008 | | |
+---------------------------------------------------------------------+--------------+--+-------------+
| | | | | | to 31 August | | 30 June |
| | | | | | 2009 | | 2008 |
+--------------+----------+-------------+----+------------------------+--------------+--+-------------+
| | | | | | GBP | | GBP |
+--------------+----------+-------------+----+------------------------+--------------+--+-------------+
| Movements in the period/year: | | | |
+---------------------------------------------------------------------+--------------+--+-------------+
| Opening valuation | | 50,895,244 | | 53,903,411 |
+--------------------------------------------+------------------------+--------------+--+-------------+
| Premiums paid | | | 6,459,242 | | 4,490,367 |
+---------------------------------------+----+------------------------+--------------+--+-------------+
| Proceeds from the maturities of investments | (9,586,000) | | (1,903,579) |
+---------------------------------------------------------------------+--------------+--+-------------+
| Realised gain on maturities | | 4,664,216 | | 844,038 |
+--------------------------------------------------+------------------+--------------+--+-------------+
| Unrealised movement in appreciation/(depreciation) | | | |
| on revaluation of investments | | | |
+ +--------------+--+-------------+
| | 5,820,472 | | (6,438,993) |
+---------------------------------------------------------------------+--------------+----------+-------------+
| | | | | | | | |
+--------------+----------+---------------------+-----+---------------+--------------+--+-------------+
| Closing valuation | | | 58,253,174 | | 50,895,244 |
+-----------------------------------------------+-----+---------------+--------------+--+-------------+
| | | | | | | | |
+--------------+----------+---------------------+-----+---------------+--------------+--+-------------+
| Comprising: | | | | | | |
+-------------------------+---------------------+-----+---------------+--------------+--+-------------+
| Closing book cost | | | 56,714,577 | | 55,177,119 |
+-----------------------------------------------+-----+---------------+--------------+--+-------------+
| Closing unrealised appreciation | | 1,538,597 | | (4,281,875) |
+-----------------------------------------------------+---------------+--------------+--+-------------+
| | | | | | | | |
+--------------+----------+---------------------+-----+---------------+--------------+--+-------------+
| Closing valuation | | | 58,253,174 | | 50,895,244 |
+--------------+----------+-------------+----+--+--+--+---------------+--------------+--+-------------+
+-----+-------+----------+---------+---------+----+---------------+--+-------------+
| (c) | Net gain/(loss) on investments held | | | | |
| | at fair value through profit or loss | | | | |
+-----+--------------------------------------+----+---------------+--+-------------+
| | | | | | Period from | | Year ended |
| | | | | | 1 July 2008 | | 30 June |
| | | | | | to 31 August | | 2008 |
| | | | | | 2009 | | |
+-----+------------------+---------+---------+----+---------------+--+-------------+
| | | | | | | GBP | | GBP |
+-----+-------+----------+---------+---------+----+---------------+--+-------------+
| | | | | | | | | |
+-----+-------+----------+---------+---------+----+---------------+--+-------------+
| | Realised gain on | | | 4,664,216 | | 844,038 |
| | maturities | | | | | |
+-----+----------------------------+---------+----+---------------+--+-------------+
| | | | | | | | | |
+-----+-------+----------+---------+---------+----+---------------+--+-------------+
| | Unrealised movement in | 5,820,472 | | (6,438,993) |
| | appreciation/(depreciation) on | | | |
| | revaluation of investments | | | |
+-----+-------------------------------------------+---------------+--+-------------+
| | | | | | | | | |
+-----+-------+----------+---------+---------+----+---------------+--+-------------+
| | | | | | | 10,484,688 | | (5,594,955) |
+-----+-------+----------+---------+---------+----+---------------+--+-------------+
+----------------------+--+-----------+--+-------------+--+-------------+--+-------------+
| (d) Derivative financial instruments | | | | |
| | | | | |
+------------------------------------------------------+--+-------------+--+-------------+
| | | | | | | | | |
+----------------------+--+-----------+--+-------------+--+-------------+--+-------------+
| Forward currency contracts | | | | | | |
| | | | | | | |
+-------------------------------------+--+-------------+--+-------------+--+-------------+
| | | | | | | | | |
+----------------------+--+-----------+--+-------------+--+-------------+--+-------------+
| As at 31 August 2009 | | | | | | | |
+-------------------------+-----------+--+-------------+--+-------------+--+-------------+
| | | | | | | | | |
+----------------------+--+-----------+--+-------------+--+-------------+--+-------------+
| | | | | | | | | |
+----------------------+--+-----------+--+-------------+--+-------------+--+-------------+
| Outstanding | | Average | | Contract | | Contract | | |
+----------------------+--+-----------+--+-------------+--+-------------+--+-------------+
| contracts | | exchange | | amount | | amount | | Fair |
| | | rate | | USD | | GBP | | value |
| | | | | | | | | GBP |
+----------------------+--+-----------+--+-------------+--+-------------+--+-------------+
| Buy GBP | | 1.8229 | | 78,500,000 | | 43,063,246 | | (5,267,179) |
+----------------------+--+-----------+--+-------------+--+-------------+--+-------------+
| Sell GBP | | 1.4644 | | (7,500,000) | | (5,121,551) | | (453,438) |
+----------------------+--+-----------+--+-------------+--+-------------+--+-------------+
| | | | | 71,000,000 | | 37,941,695 | | (5,720,617) |
+----------------------+--+-----------+--+-------------+--+-------------+--+-------------+
| As at 30 June 2008 | | | | | | | |
+-------------------------+-----------+--+-------------+--+-------------+--+-------------+
| | | | | | | | | |
+----------------------+--+-----------+--+-------------+--+-------------+--+-------------+
| Outstanding | | Average | | Contract | | Contract | | |
| | | | | | | | | |
+----------------------+--+-----------+--+-------------+--+-------------+--+-------------+
| contracts | | exchange | | amount | | amount | | Fair |
| | | rate | | USD | | GBP | | value |
| | | | | | | | | GBP |
+----------------------+--+-----------+--+-------------+--+-------------+--+-------------+
| Buy GBP | | 1.8109 | | 89,000,000 | | 49,045,971 | | 1,305,132 |
+----------------------+--+-----------+--+-------------+--+-------------+--+-------------+
The Company hedges its US dollar exposure by entering into forward sales of US
dollars in sterling. At the period end there were twelve outstanding forward
foreign exchange contracts for the sale of US$78.5 million against sterling
contracts maturing 30 March 2012 and one contract for the purchase of US$7.5
million against a sterling contract maturing 30 March 2012.
10 Other receivables
+--+--------------+--------+----------+--------------+--+---------------+
| | | | | 31 August | | 30 June |
| | | | | 2009 | | 2008 |
+--+--------------+--------+----------+--------------+--+---------------+
| | | | | GBP | | GBP |
+--+--------------+--------+----------+--------------+--+---------------+
| | | | | | | |
+--+--------------+--------+----------+--------------+--+---------------+
| Sundry debtors | | | 11,348 | | 17,631 |
+-----------------+--------+----------+--------------+--+---------------+
| Maturity proceeds | | 4,609,711 | | 225,870 |
| receivable * | | | | |
+--------------------------+----------+--------------+--+---------------+
| | | | | | | |
+--+--------------+--------+----------+--------------+--+---------------+
| | | | | 4,621,059 | | 243,501 |
+--+--------------+--------+----------+--------------+--+---------------+
* The above maturity proceeds receivable have been received subsequent to the
period end.
11 Cash and cash equivalents
Any amounts held on deposit or in current accounts at the Company's Custodian,
Sub-Custodian or financial institutions are included in cash or cash
equivalents.
12 Other payables
+--+------------+--------------------+--------------+--+---------------+
| | | | 31 August | | 30 June |
| | | | 2009 | | 2008 |
+--+------------+--------------------+--------------+--+---------------+
| | | | GBP | | GBP |
+--+------------+--------------------+--------------+--+---------------+
| | | | | | |
+--+------------+--------------------+--------------+--+---------------+
| Accrued expenses | 435,398 | | 359,773 |
+------------------------------------+--------------+--+---------------+
| | | | | | |
+--+------------+--------------------+--------------+--+---------------+
| | | | 435,398 | | 359,773 |
+--+------------+--------------------+--------------+--+---------------+
13 Loan facility
As at 31 August 2009 the Company had a US$28,000,000 (30 June 2008:
US$30,000,000) secured term loan, and a secured revolving credit facility of
US$10,000,000 with Allied Irish Banks plc. Interest is payable at LIBOR plus
2.50% on the revolving credit facility and at LIBOR plus 2.0% in respect of the
term loan facility. As at 31 August 2009 US$33,447,006 (GBP20,557,471) had been
drawn down (2008: US$28,200,000 (GBP14,154,495 and GBP750,000)). The facility
expires in March 2010, but it is expected to be replaced by a new facility in
January 2010.
Borrowings 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 GBP1 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 GBP1 per Share on 25 March 2004.
The issue costs incurred of GBP831,764 were debited against the share premium
account to leave net proceeds of the share issue of GBP39,168,236.
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
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.
At an Extraordinary General Meeting held on 28 August 2009 the Articles of
Incorporation were amended so that the US Traded Life Interests Fund now has an
unlimited life, subject to regular continuation votes from 2012 onward. However,
shareholders shall be offered the opportunity to vote on the continuation of the
Fund at the annual general meeting in 2012 and annually thereafter.
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 Company will be seeking to renew this authority at the forthcoming Annual
General Meeting.
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 Offical 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 then expire at the Annual General Meeting of
the Company in 2011 unless such authority is varied, revoked or renewed prior to
such date by a special resolution of the Company in general meeting.
During the period under review no Shares were bought back for cancellation
(2008: nil).
16 Other reserves
+---------+----------+----------+--+----------+------------+----------+-------------+--+-------------+---------+-------------+
| | | | | | Capital Reserve | | Revenue | | |
+---------+----------+----------+--+----------+-------------------------------------+--+-------------+---------+-------------+
| | | | | | Realised | | Unrealised | | Reserves | | Total |
+---------+----------+----------+--+----------+------------+----------+-------------+--+-------------+---------+-------------+
| | | | | | 2009 | | 2009 | | 2009 | | 2009 |
+---------+----------+----------+--+----------+------------+----------+-------------+--+-------------+---------+-------------+
| | | | | | GBP | | GBP | | GBP | | GBP |
+---------+----------+----------+--+----------+------------+----------+-------------+--+-------------+---------+-------------+
| | | | | | | | | | | | |
+---------+----------+----------+--+----------+------------+----------+-------------+--+-------------+---------+-------------+
| Opening balance | | | 3,665,049 | | (1,489,936) | | (2,967,644) | | (792,531) |
+-------------------------------+--+----------+------------+----------+-------------+--+-------------+---------+-------------+
| Realised gain on maturities | 4,664,216 | | - | | - | | 4,664,216 |
+---------------------------------------------+------------+----------+-------------+--+-------------+---------+-------------+
| Movement in unrealised appreciation on | - | | 5,820,472 | | - | | 5,820,472 |
| investments | | | | | | | |
+---------------------------------------------+------------+----------+-------------+--+-------------+---------+-------------+
| Movement in unrealised currency loss on | | | | | | | |
| forward | | | | | | | |
| foreign currency contracts | | | | | | | |
+ +------------+----------+-------------+--+-------------+---------+-------------+
| | | | (7,025,749) | | | | (7,025,749) |
+---------------------------------------------+------------+----------+-------------+--+-------------+---------+-------------+
| Movement in unrealised currency | | - | | (3,245,159) | | - | | (3,245,159) |
| losses | | | | | | | | |
+----------------------------------+----------+------------+----------+-------------+--+-------------+---------+-------------+
| Revenue loss for the period | - | | - | | (1,524,889) | | (1,524,889) |
+---------------------------------------------+------------+----------+-------------+--+-------------+---------+-------------+
| | | | | | | | | | | | |
+---------+----------+----------+--+----------+------------+----------+-------------+--+-------------+---------+-------------+
| Closing balance | | | 8,329,265 | | (5,940,372) | | (4,492,533) | | (2,103,640) |
+---------+----------+----------+--+----------+------------+----------+-------------+--+-------------+---------+-------------+
+---------+----------+----------+--+----------+------------+----------+-------------+--+-------------+---------+-------------+
| | | | | | Capital Reserve | | Revenue | | |
+---------+----------+----------+--+----------+-------------------------------------+--+-------------+---------+-------------+
| | | | | | Realised | | Unrealised | | Reserves | | Total |
+---------+----------+----------+--+----------+------------+----------+-------------+--+-------------+---------+-------------+
| | | | | | 2008 | | 2008 | | 2008 | | 2008 |
+---------+----------+----------+--+----------+------------+----------+-------------+--+-------------+---------+-------------+
| | | | | | GBP | | GBP | | GBP | | GBP |
+---------+----------+----------+--+----------+------------+----------+-------------+--+-------------+---------+-------------+
| | | | | | | | | | | | |
+---------+----------+----------+--+----------+------------+----------+-------------+--+-------------+---------+-------------+
| 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 | | - | | (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 | | - | | (90,307) | | - | | (90,307) |
| losses | | | | | | | | |
+----------------------------------+----------+------------+----------+-------------+--+-------------+---------+-------------+
| Revenue loss for the year | | - | | - | | (1,461,054) | | (1,461,054) |
+----------------------------------+----------+------------+----------+-------------+--+-------------+---------+-------------+
| | | | | | | | | | | | |
+---------+----------+----------+--+----------+------------+----------+-------------+--+-------------+---------+-------------+
| Closing balance | | | 3,665,049 | | (1,489,936) | | (2,967,644) | | (792,531) |
+---------+----------+----------+--+----------+------------+----------+-------------+--+-------------+---------+-------------+
17 Related party transactions
Fees earned by the Directors of the Company during the period were GBP49,584 of
which GBP7,083 was outstanding at the period end (2008: GBP42,470 of which
GBP10,567 was outstanding at the year end).
18 Financial risk management objectives and policies
The main risks to which the Company is exposed are market and longevity risk,
currency risk and 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 31 August 2009 net assets
attributable to the holders of Shares was GBP37,064,596 (2008: GBP38,375,705).
As at 31 August 2009, the Company had borrowed US$33.4 million from Allied Irish
Banks. 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.
As at 31 August 2009, the current portfolio comprises 139 TLIs. All TLIs
acquired are Whole-of-Life or Universal Life policies.
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 Poor's 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. Once the investment
programme was concluded, 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.
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 it 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 60 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 31 August 2009 the weighted average swap yield was 2.6%; 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 9.4% (2008:
8.50%), resulting in an overall average IRR of 12%.
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 31 August 2009, should each individual 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 GBP1,757,695.
At 31 August 2009, should each individual 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 GBP1,869,612.
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.
Any new life expectancy obtained from the Investment manager is also
incorporated. 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 31 August 2009, 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
GBP12,217,793. In order to achieve this, mortality would have to be 38% lower
than that assumed in the valuation.
At 31 August 2009, 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
GBP13,328,392. In order to achieve this, mortality would have to be 60% 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$78.5 million and forward purchased US$7.5 million which means that at
the current valuation, the Company's net exposure to US dollars was US$0.9
million. In the event that expected future US$0.9 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 31 August 2009 the Company's net currency exposure was as follows:
+------+---+----------+---------------+---------------+--+--------------+
| | | | | 2009 | | 2008 |
+------+---+----------+---------------+---------------+--+--------------+
| | | | | GBP | | GBP |
+------+---+----------+---------------+---------------+--+--------------+
| | | | | | | |
+------+---+----------+---------------+---------------+--+--------------+
| U.S. Dollar | | 38,537,656 | | 37,903,068 |
+---------------------+---------------+---------------+--+--------------+
| Less: | (37,941,695) | | (44,671,987) |
| Effect of forward foreign exchange | | | |
| contracts | | | |
+-------------------------------------+---------------+--+--------------+
| | | | | | | |
+------+---+----------+---------------+---------------+--+--------------+
| | | | | 595,961 | | (6,768,919) |
+------+---+----------+---------------+---------------+--+--------------+
The above analysis excludes maturity proceeds receivable and short term other
receivables and other payables.
At 31 August 2009, had pound sterling strengthened against the US dollar by 5%
with all other variables held constant, the decrease in net assets attributable
to Shareholders would amount to approximately GBP28,379 (2008: increase
GBP322,239). A decrease of 5% would amount to an increase in net assets
attributable to Shareholders of approximately GBP31,388 (2008: decrease
GBP356,509).
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 31
August 2009:
+----------+--+-------------+--+-------------+--+--------------+--+--------------+--+-------------+--+------------+
| | | Financial | | Floating rate financial | | Total |
| | | assets/(liabilities) | | assets/(liabilities) | | |
| | | on which no interest | | | | |
| | | is paid | | | | |
+----------+--+------------------------------+--+--------------------------------+--+-----------------------------+
| | | 2009 | | 2008 | | 2009 | | 2008 | | 2009 | | 2008 |
+----------+--+-------------+--+-------------+--+--------------+--+--------------+--+-------------+--+------------+
| | | GBP | | GBP | | GBP | | GBP | | GBP | | GBP |
+----------+--+-------------+--+-------------+--+--------------+--+--------------+--+-------------+--+------------+
| | | | | | | | | | | | | |
+----------+--+-------------+--+-------------+--+--------------+--+--------------+--+-------------+--+------------+
| Sterling | | (5,720,617) | | 1,305,132 | | 61,896 | | (716,223) | | (5,658,721) | | 588,909 |
+----------+--+-------------+--+-------------+--+--------------+--+--------------+--+-------------+--+------------+
| U.S. | | 58,253,174 | | 50,895,244 | | (19,715,518) | | (12,992,176) | | 38,537,656 | | 37,903,068 |
| Dollars | | | | | | | | | | | | |
+----------+--+-------------+--+-------------+--+--------------+--+--------------+--+-------------+--+------------+
| | | 52,532,557 | | 52,200,376 | | (19,653,622) | | (13,708,399) | | 32,878,935 | |38,491,977 |
+----------+--+-------------+--+-------------+--+--------------+--+--------------+--+-------------+--+------------+
The above analysis excludes short term other receivables and other payables as
the material amounts are non-interest bearing.
At 31 August 2009, should interest rates have decreased by 100 basis points with
all other variables remaining constant, the increase in net assets attributable
to Shareholders for the year would amount to approximately GBP196,536 (2008:
GBP137,084). A decrease of 100 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$38,000,000 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).
The future premiums payable on the Company's portfolio are not deemed to be
financial liabilities for the purposes of this note:
+------------+------+--+------------+----------+--------------+-------------+-------------+--------------+
| As at 31 August 2009 | | | | | | |
+----------------------+------------+----------+--------------+-------------+-------------+--------------+
| | | 1 month | 1 to 3 | 3 to 12 | 1 to 5 | >5 years | Total |
| | | or less | months | months | years | | |
+-------------------+--+------------+----------+--------------+-------------+-------------+--------------+
| Financial assets: | | GBP | GBP | GBP | GBP | GBP | GBP |
+-------------------+--+------------+----------+--------------+-------------+-------------+--------------+
| At fair value | | | | | | |
| through profit | | | | | | |
+----------------------+------------+----------+--------------+-------------+-------------+--------------+
| and loss | | - | 175,357 | - | 33,776,028 | 24,301,789 | 58,253,174 |
+------------+---------+------------+----------+--------------+-------------+-------------+--------------+
| Other receivables | 4,621,059 | - | - | - | - | 4,621,059 |
+----------------------+------------+----------+--------------+-------------+-------------+--------------+
| Cash and cash | 903,849 | - | - | - | - | 903,849 |
| equivalents | | | | | | |
+----------------------+------------+----------+--------------+-------------+-------------+--------------+
| | | | | | | | |
+------------+---------+------------+----------+--------------+-------------+-------------+--------------+
| | | 5,524,908 | 175,357 | - | 33,776,028 | 24,301,789 | 63,778,082 |
+------------+---------+------------+----------+--------------+-------------+-------------+--------------+
| | | | | | | | |
+------------+---------+------------+----------+--------------+-------------+-------------+--------------+
| Financial | | | | | | |
| liabilities: | | | | | | |
+----------------------+------------+----------+--------------+-------------+-------------+--------------+
| Derivative financial | - | - | - | (5,720,617) | - | (5,720,617) |
| instrument | | | | | | |
+----------------------+------------+----------+--------------+-------------+-------------+--------------+
| Loan facility | - | - | (20,557,471) | - | - | (20,557,471) |
+----------------------+------------+----------+--------------+-------------+-------------+--------------+
| Other payables | (435,398) | - | - | - | - | (435,398) |
+----------------------+------------+----------+--------------+-------------+-------------+--------------+
| | | | | | | | |
+------------+---------+------------+----------+--------------+-------------+-------------+--------------+
| | | (435,398) | - | (20,557,471) | (5,720,617) | - | (26,713,486) |
+------------+---------+------------+----------+--------------+-------------+-------------+--------------+
| | | | | | | | |
+------------+---------+------------+----------+--------------+-------------+-------------+--------------+
| | | 5,089,510 | 175,357 | (20,557,471) | 28,055,411 | 24,301,789 | 37,064,596 |
+------------+---------+------------+----------+--------------+-------------+-------------+--------------+
| | | | | | | | |
+------------+---------+------------+----------+--------------+-------------+-------------+--------------+
| As at 30 June 2008 | | | | | | |
+----------------------+------------+----------+--------------+-------------+-------------+--------------+
| | | 1 month | 1 to 3 | 3 to 12 | 1 to 5 | >5 years | Total |
| | | or less | months | months | years | | |
+-------------------+--+------------+----------+--------------+-------------+-------------+--------------+
| Financial assets: | | GBP | GBP | GBP | GBP | GBP | GBP |
+-------------------+--+------------+----------+--------------+-------------+-------------+--------------+
| At fair value | | | | | | |
| through profit | | | | | | |
+----------------------+------------+----------+--------------+-------------+-------------+--------------+
| and loss | | 77,979 | - | - | 21,599,055 | 29,218,210 | 50,895,244 |
+------------+---------+------------+----------+--------------+-------------+-------------+--------------+
| Derivative financial | - | - | 580,358 | 724,774 | - | 1,305,132 |
| instrument | | | | | | |
+----------------------+------------+----------+--------------+-------------+-------------+--------------+
| Other receivables | 243,501 | - | - | - | - | 243,501 |
+----------------------+------------+----------+--------------+-------------+-------------+--------------+
| Cash and cash | 1,196,096 | - | - | - | - | 1,196,096 |
| equivalents | | | | | | |
+----------------------+------------+----------+--------------+-------------+-------------+--------------+
| | | | | | | | |
+------------+---------+------------+----------+--------------+-------------+-------------+--------------+
| | | 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 |
+------------+------+--+------------+----------+--------------+-------------+-------------+--------------+
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 2010, when
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 seek to move the short-term
deposits or cash to another bank.
Concentration risk
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 had 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.
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.
19 Events after the balance sheet date
On 1 September 2009 the Company became resident for tax purposes in the UK and
from that date the Company has been managed in such a way as to meet the
conditions for approval in due course as an Investment Trust under Section 842
of the Income and Corporation Taxes Act 1988 in respect of the accounting period
commencing on 1 September 2009 and all subsequent periods.
In light of a recent US Internal Revenue Service Ruling, the Board concluded
that it would benefit the Company if it became UK tax resident and is approved
in due course as an Investment Trust. The Board believed that the adoption of UK
tax residency would enable the Company to avail itself of protection under the
UK/US double taxation treaty and thus mitigate the impact of US withholding tax
on future payments of death benefits.
20 Contingent Liabilities
Following a ruling issued by the US Internal Revenue Service ("IRS") during the
period, the Board has received advice from its US tax counsel in respect of
withholding tax on the proceeds of certain maturities already received by the
Company prior to its move to a UK tax residency. The Directors are of the view
that there is significant doubt about liability under US law for such a levy on
the relevant maturity receipts and the Directors are not aware of any evidence
to date that any levy will be imposed by the IRS with retrospective effect.
The Company received approximately $20 million of maturity proceeds prior to its
adoption of UK tax residency on 1 September 2009. If US withholding tax were to
be payable with respect to these past maturities the Board has estimated that
such a liability would not exceed $3.5 million (before interest and penalties if
applicable), calculated on the basis that the relevant withholding tax rate has
been 30% since the inception of the Company.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR FEFFIDSUSEFE
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