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Altern Asset Opps Ld (TLI)

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Wednesday 02 October, 2013

Altern Asset Opps Ld

Final Results

RNS Number : 4747P
Alternative Asset Opps PCC Ltd
02 October 2013
 



ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Annual Financial Report Announcement

For the year ended 30 June 2013

 

The Directors announce the Annual Financial Report for the year ended 30 June 2013.  

 

The Company has today, in accordance with DTR 6.3.5, submitted its Annual Financial Report for the year ended 30 June 2013 to the National Storage Mechanism and it will shortly be available for inspection at http://www.hemscott.com/nsm.do.  The Annual Financial Report is available to be viewed on or downloaded from the Company's website at www.allianzgi.co.uk/TLI .

 

The financial information set out in this announcement does not constitute the Company's statutory accounts for the year ended 30 June 2013, but is derived from those accounts. Statutory accounts for the year ended 30 June 2013 will be delivered to Shareholders during September 2013. 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 September 2013.  This announcement has been prepared using accounting policies consistent with those set out in the Company's annual report and financial statements for the year ended 30 June 2013.

 

The Net Asset Value as at 31 August 2013 is expected to be released in a separate announcement shortly.

 

The Annual General Meeting of the Company will be held on 13 November 2013.

 

 

Peter Ingram

Company Secretary

 

Telephone number:  020 7065 1467

 

Melissa Gallagher

Head of Investment Trusts, Allianz Global Investors

 

Telephone number:  020 7065 1539

 

 

 

1 October 2013

 

155 Bishopsgate

London

EC2M 3AD



ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Investor Information

For the year ended 30 June 2013

 

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 Companies (Guernsey) Law, 1994, and subsequently re-registered under the provisions of The Companies (Guernsey) Law, 2008, as amended.  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 launch. The Company is regulated by the Guernsey Financial Services Commission as an authorised fund under the Protection of Investors (Bailiwick of Guernsey) Law, 2008, as amended.

 

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 2012 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 Corporation Tax Act 2010, 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.

 

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 US 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 78 and 92 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. Page 32 discloses the current ratings against the Company's exposure based on year-end valuation. 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 the assets of the Fund, in accordance with the investment objective and policy, and subject to advice received from the Investment Manager. At present there is no intention to acquire further policies, but sales of policies may occasionally be made when appropriate. The Company has the ability to incur borrowings to be applied in meeting TLI acquisition costs, premium payments and expenses. The Company's borrowings as at 30 June 2013 were US$5.9 million (£3.9 million (2012: US$29.2 million (£18.6 million)). The terms of these borrowings may require the Company to utilise the net proceeds of maturing TLIs to repay borrowings, but, subject to any such covenants, the Company may return capital to shareholders either by means of the purchase of shares in the market as authorised by shareholders resolution or by return of capital in accordance with the Articles.

ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Investor Information (continued)

For the year ended 30 June 2013

 

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.

 



 

ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Investor Information (continued)

For the year ended 30 June 2013

 

 

Directors

Registrar

CPG Tracy (Chairman)

Capita Registrars (Guernsey) Limited

DIW Reynolds (Chairman of the Audit Committee)   

Mont Crevelt House,

Bulwer Avenue

JPHS Scott

St Sampson

SM Zein    (resigned 20 February 2013)

TJ Emmott (appointed 20 February 2013)

Guernsey GY2 4LH



Registered Office

Investment Manager

Dorey Court

SL Investment Management Limited

Admiral Park

8/11 Grosvenor Court

St Peter Port

Foregate Street

Guernsey GY1 2HT

Chester CH1 1HG



Manager

Banker (UK)

RCM (UK) Limited

Allied Irish Banks

155 Bishopsgate

St Helen's

London 

1 Undershaft

EC2M 3AD

London EC3A 8AB



Secretary

Banker (Guernsey)

RCM (UK) Limited

Kleinwort Benson (Channel Islands)  Limited

155 Bishopsgate

Dorey Court, Admiral Park

London EC2M 3AD

St Peter Port

Represented by PWI Ingram FCIS

Guernsey GY1 2HT



Administrator  

Custodian

Kleinwort Benson (Channel Islands)

Kleinwort Benson (Guernsey) Limited

Fund Services Limited   

Dorey Court, Admiral Park

Dorey Court, Admiral Park

St Peter Port

St Peter Port    

Guernsey GY1 2HT

Guernsey GY1 2HT




Legal Advisers (UK)    

Sub Custodian

Herbert Smith Freehills LLP

Wells Fargo Bank Northwest N.A.

Exchange House

260 North Charles Lindbergh Drive

Primrose Street

Salt Lake City

London EC2A 2HS

UT 84116



Legal Advisers (Guernsey)

Financial Adviser and Corporate Broker

Carey Olsen

Westhouse Securities Limited

PO Box 98

Heron Tower

Carey House, Les Banques

110 Bishopsgate

St Peter Port

London EC2N 4AY

Guernsey GY1 4BZ




Recognised Auditor


Deloitte LLP


Regency Court


Glategny Esplanade


St Peter Port


Guernsey GY1 3HW


                                               



 

ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Investor Information (continued)

For the year ended 30 June 2013

 

Directors

The Directors have been chosen for their investment and commercial experience and are listed below:

 

Charles Tracy, Chairman, (aged 67) 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 Services Limited and Chairman of the Board of the Guernsey Banking Deposit Compensation Scheme. He is a resident of Guernsey.

 

Ian Reynolds (aged 70) is a former Chief Executive of Commercial Union Life Assurance Company and a former director of Liverpool Victoria Friendly Society. He is a director of The Equitable Life Assurance 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.

 

John Scott (aged 61) is currently a director of several UK investment trusts and is Chairman of Scottish Mortgage Investment Trust PLC. 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.

 

Tim Emmott (aged 60) was appointed a Director on 20 February 2013. He has over 35 years' experience in banking and investment in a variety of analytical, trading and management roles. He has been involved in investing in distressed, illiquid and alternative financial assets for the past 20 years and is currently a director of Economic Lifestyle Property Investment Company Limited, a fund listed on the Channel Islands Stock Exchange. He is UK resident.

 

The Investment Manager

The Investment Manager, SL Investment Management Limited, which is authorised and regulated in the United Kingdom by the Financial Conduct Authority, was incorporated in 1990 and is an Investment Manager for a range of specialist investment products.

 

The Manager

RCM (UK) Limited, which is authorised and regulated in the United Kingdom by the Financial Conduct Authority, is manager of a number of closed-ended investment companies with approximately £1.1 billion of such assets under management in a range of investment companies and investment trusts as at 30 June 2013. The Manager is responsible for managing the cash and fixed interest holdings of the Fund and foreign currency hedging.



 

ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Financial Highlights

For the period from 1 July 2012 to 30 June 2013

 








At 30

June 2013


At 30

June 2012











Shares in issue






72,000,000


40,000,000











Net assets attributable to shareholders


£34,907,478


£32,468,299











Net asset value per Share




48.5p*


81.2p

 

Mid market share price

 


45.5p


47.3p

Total (deficit)/surplus on ordinary activities for the financial year per Share


(12.02p)


4.00p











Revenue deficit per Share





(1.86p)


(2.89p)

 

Dividends

The Directors do not propose a dividend for the year ended 30 June 2013 (2012: nil).

 

* The decrease of the net asset value per Share in the current year to 30 June 2013 partly reflects the issue of 32,000,000 Shares at 32p per Share through a Placing and Open Offer. Note also comments on valuation policy in the Chairman's Statement



 

ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Chairman's Statement

For the year ended 30 June 2013

 

Introduction

The twelve months to 30 June 2013 has been a year of substantial development for your Company, with a successful Placing and Open Offer resulting in borrowings being significantly reduced; at the time of writing the Company is in net cash surplus. The number of policy maturities was at the same level as in recent years, but the policies maturing during our financial year were relatively small in size, resulting in a net negative cash flow. Since the year end, however, one large maturity has made a significant difference to the cash position. A further three maturities have been identified but not yet formally certified. Nonetheless, the overall level of maturities since inception has been more than 50% lower than originally anticipated.

 

I draw your attention to the section headed 'Valuation' below. A significant change in the Company's valuation policy has now been introduced, backdated to 30 June 2013. The effect is a reduction in the published NAV per share as at that date from 55.6p to 48.5p, a fall of 12.8%. In simple terms, the Board has taken a more conservative view on the life expectancy figures provided by independent assessors.

 

The Company's functional and reporting currency is Sterling, however, because the TLI portfolio and the Company's borrowings are denominated in US Dollars, some of the reporting below is given in US Dollars. The £/US$ exchange rate as at 30 June 2013 used for these accounts was 1.5167.

 

Portfolio developments

A summary of portfolio maturities since inception is given in the following table:

 

Period

66 months

10 months

12 months

12 months

12 months

Dates

Inception - 30/6/09

1/9/09 - 30/6/10

1/7/10 - 30/6/11

1/7/11 - 30/6/12

1/7/12 - 30/6/13

Number of policies matured

20

4

6

8

7

Face value of policies matured ($ million)

$27.6m

$10.6m

$13.0m

$16.9m

$5.7m

Premiums paid ($ million)

$38.3m

$7.3m

$8.0m

$8.4m

$8.2m

 

During the year to 30 June 2013, 7 policy maturities were identified, with a total face value of US$ 5.7 million. This compares with 8 policies with a face value of US$16.9 million in the year to 30 June 2012, and 30 policies with a face value of US$51.2 million in the period from the Company's launch to 30 June 2011. Unlike the preceding year, maturity proceeds did not exceed cash outflows for premiums, although a large maturity was identified post year end, as noted below.

 

The realised gains on maturing policies amounted to approximately US$2.3 million in the year, or 2.1p per share.  Unlike last year, when the effect of gains on maturities outweighed the premiums paid, policy re-valuations and overheads, the overall result for the year was a reduction in net assets per share of 12.02p, compared to a gain of 4.00p in the previous year.

 

Four further maturities, relating to four lives assured, have been identified after the year end.  Cash proceeds for the first maturity (US$5.0 million) were received in August 2013. The three other maturities with a combined face value of US$1.8million have not yet been formally certified.

 



 

ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Chairman's Statement (continued)

For the year ended 30 June 2013

 

Portfolio developments (continued)

As at 30 June 2013 there were a total of 102 policies in the portfolio, with a face value of US$159.9 million and a valuation of US$56.0 million.  There have been no policy acquisitions since completion of the original policy purchase programme, but premiums continue to be paid on policies in force, amounting to US$8.2 million during the year, and assuming no maturities, would amount to US$8.7 million for the year to 30 June 2014.

 

On 5 October 2012 the Board announced proposals to raise up to £10.2 million through the issue of up to 32,000,000 new shares at an Issue Price of 32 pence per share through a Placing and Open Offer on the basis of 4 new shares for every 5 existing shares. The renewal of the Company's loan facility with Allied Irish Banks ("AIB") was conditional upon raising at least US$10 million under the Placing and Open Offer. This issue was successful, with the full number of shares being taken up, and raised a net total of £9.7 million.

 

Gearing

The Board's policy has been to pay down borrowings whenever possible; to date, our loan covenants have provided us with no alternative to this. During the year the Company's total borrowings decreased from US$29,210,000 to US$5,939,000. This reflected policy maturity receipts totalling US$17,670,000, including US$12,020,000 relating to policies maturing in the previous financial year, and the net proceeds of the Placing and Open Offer referred to above, equivalent to US$15,601,000.

 

On 30 October 2012, the Company renewed its loan agreement with AIB. This will provide the necessary financing for the period to 31 March 2014.  Ongoing discussions continue with regards to the Company's future financing requirements and, given the current high level of loan cover, the Board will be seeking more flexible arrangements at renewal.

 

Valuation

The current Net Asset Value as released to the market is a Directors' valuation, prepared with the assistance of the Investment Manager, which uses estimates of life expectancy to arrive at a table of cash flows, based on actuarial principles discounted to present value using a discount rate (or internal rate of return, IRR). The key factors in the valuation are therefore: the policy face value and the premiums payable; the assumed life expectancy (LE) of the insured; the actuarial mortality table; and the discount rate. 

 

The Board has previously advised that it was reconsidering policy valuations and anticipated a reduction in published NAV per share as a result. Having now obtained a number of new LEs on a significant number of lives, representing more than 40% of the portfolio by face value, the Board, after seeking advice from the Manager and the Investment Manager, has now reached a conclusion on a new approach.

Up to the end of 2012, the Board obtained the majority of its LE estimates from two major providers. Although past experience is that they have tended to underestimate LEs, both have recently made alterations to their underwriting methodology to address these issues, and the Board was therefore keen to establish what, if any, effect these changes might have on the LEs previously provided. So it commenced a programme of re-assessment of LEs, involving 38 policies with a face value of well over half the total portfolio, and a total of 34 lives. So far, 29 of these policies have been fully re-assessed.

 



 

ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Chairman's Statement (continued)

For the year ended 30 June 2013

 

Valuation (continued)

The Board was pleasantly surprised to note that the result of this exercise so far, if applied across the whole portfolio, would be to reduce portfolio LEs by approximately 1 month and increase valuations by around 1%. The Board has, however, become aware that third party evidence suggests that these providers continue to underestimate LEs, and this seems to correspond to the Company's experience to date. LE estimates were therefore obtained, starting in April 2013, from a third provider, whose LE estimates typically are longer than those of other industry participants. As expected, their estimates for the policies assessed so far were indeed significantly longer (by an average of 24 months compared to the average from the original two LE providers).

Weighing this information up, the Board decided that it was appropriate to adopt the average of the three providers' estimates, which take account not only of the most recent LE calculation methodologies but also of changes in the medical status of the insured lives. The use of a third LE provider introduces a more conservative element into the valuation process, although it should be noted that the majority of market participants have tended to use just the original two providers when trading policies. This new approach left two issues to be decided.

The first related to the valuation of those policies which have not recently (that is to say since 1 April 2013) had a new LE estimate. The Board could, of course, have continued its policy of using simply the last obtained LE estimate regardless of recency and providing projections for shareholders of the hypothetical effect of changes in LE for the remaining policies on the NAV. The Board has, however, decided that there is good enough evidence that it should use more conservative (i.e. longer) LEs, and that it cannot ignore the outcome of the figures obtained so far based on three providers. So far, 29 policies with a face value amounting to over 40% of the portfolio have been re-assessed. The average change in LE is an increase of approximately 12%.

The Board's new policy is therefore to apply this average change to the remainder of the portfolio (with suitable adjustments for the dates of the LEs actually obtained) which results in the following changes in published NAV:

                                                              Original      Revised       Change

30 June 2013                        55.6p           48.5p          -12.8%

31 July 2013                         56.8p           50.1p          -11.8%

This change in policy has been adopted with retrospective effect for the accounts for the last financial year to 30 June 2013 and will be reflected in future NAV announce-ments.

The second issue is the choice of IRR used for valuation purposes. The Board has explained its use of a 12% IRR in previous communications. There have been few trades in policies which match the Company's portfolio, but the Board notes that some recent trades by other vendors appear to have been taking place at higher IRRs. Given that the market typically has tended to use the original two LE providers historically used by the Company in arriving at a price for a TLI policy, we consider that it would be a form of double counting both to adopt a more conservative LE policy as above and to use higher IRRs. If the Board were to keep to its old dual provider approach but adopt, say, a 14% IRR the effect on valuation would be reduction in NAV of about 6%. It has, however, decided to retain the 12% IRR assumption, which reflects the fact that the portfolio is held for the long term. The new policy will be more conservative than simply adopting a higher IRR, which is one of the options the Board did consider.

In arriving at its decision the Board noted that there is evidence of better demand for policies, as reported in the Investment Managers Report, and that where more conservative LE estimates are used market IRRs do indeed appear to be lower on average.

 



 

ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Chairman's Statement (continued)

For the year ended 30 June 2013

 

Valuation (continued)

The Board will continue to re-assess LEs selectively on the remaining lives. It should be noted that new LEs will not be obtained on a number of the remaining lives; in some cases medical information has proved impossible to obtain and in others the essentially fixed cost of obtaining a new LE cannot be justified in view of the relatively small value of the policy concerned.

To date the mortality rate in the portfolio (i.e. the ratio of actual deaths to expected deaths) has been below 50%. This mainly reflects the fact that LE assessments have typically been too short. Recent changes reflect more up to date medical information and a much more conservative approach to LE assessment, so that, as shown below, the average LE is now very close to that predicted by standard mortality tables. The Board feels that this new approach to valuations gives a fair estimate of market value and is based on as good an estimate of LEs in this context as can be obtained from third party sources.

 

Past mortality is not, of course, a guide to future outcomes, especially as the LE basis has been changed, but if a continuing 50% mortality rate were to be assumed with an unchanged discount rate, the net asset value per share as at 30 June 2013 would have been 20.6p per share. This figure is provided to give shareholders a measure of the effect on the portfolio of low mortality rates, but it is an illustration only; in practice the high discount rate used in valuations at least partially allows for uncertainty in this respect.

 

As ever, the return on investments will depend on actual mortality outcomes, not on projected valuations, and the Board continues to believe that shareholders' interests are best served by holding policies to maturity.

 

The tables below aim to give investors an appreciation of the effects on valuation of differing assumptions to both LE and IRR.  

 

-       The first line of NAVs in the table uses the 'Latest LE' assumption, that is to say either an LE based on a recently updated assessment (obtained on or after 1 April 2013), or for the remaining policies an adjusted LE based on the most recent LE obtained, increased by 12%.  The average LE (weighted by policy value), is shown for reference (5.0 years). NAV is then shown at four different discount rates, ranging from 10% to 20%.  This shows the effect of IRR on current value, and it also allows investors to assess the effects of policy sales if, for example, the portfolio was to be liquidated.

-       The second line shows the effect of a further increase of one year in the valuation LEs.

-       The third line shows the effect of a decrease of one year in the valuation LEs.

-       Finally, the fourth line shows the outcome of assuming LEs are simply based on the current table of life expectancies for the general population, the 2008 Valuation Basic Table, i.e. ignoring LE assessments.  This shows that portfolio LEs are now very much in line with the general population, giving some reassurance that the LEs are no longer subject to exceptional factors.

 



 

ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Chairman's Statement (continued)

For the year ended 30 June 2013

 

Sensitivity Matrix

Net Asset Value in pence per share on various assumptions as at 30 June 2013:

 

Mortality

Assumptions

Average LE (years)

Discount Rates applied to cash flows

10%

Current (12%)

16%

20%

Latest LE

5.0

52.0

48.5

42.7

38.1

+1 year for all LEs

6.0

37.7

34.6

29.6

25.7

-1 year for all LEs

4.0

67.8

64.1

57.8

52.6

Using 2008 VBT

5.1

51.4

47.7

41.7

36.9

 

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 year end 94.9% of the Company's policies by value were issued by companies with an A.M. Best rating of 'A' or better, with the remaining 5.1% rated A-. This figure has not changed significantly for some time.

 

Hedging 

The Company's original Investment Policy stated that it was the intention to hedge the US dollar exposure.  Following the removal of this statement as part of the changes to the policy adopted in September 2011, the Company's outstanding foreign exchange positions were closed out. 

 

From 30 March 2012, the Company has operated on an unhedged basis, and there is no current intention to initiate any further currency hedges.

 

During the year, the £/US$ exchange rate weakened from 1.56845 as at 30 June 2012 to 1.5167 as at 30 June 2013. As the bulk of the portfolio assets are denominated in US$, this resulted in a net gain for the portfolio of 3.3% or approximately 1.8p per share.

 

Other issues

The Board has considered the potential impact of the EU Directive on Alternative Investment Fund Managers ("AIFMD") and also the Foreign Account Tax Compliance Act ("FATCA").  Based on legal advice received it is believed that the Company does not fall within the scope of the AIFMD.  On 31 May 2013 HM Revenue & Customs published final Guidance Notes on the implementation of FATCA, which confirmed that collective investment vehicles, such as AAO, will not be regarded as a Reporting Financial Institution for the purposes of FATCA.

 

The notes to the accounts report a technical change in the Manager of the Company, following corporate reorganisation within the Allianz Group, and a small reduction in the percentage management fee, as the Company is expected to require less input from the Manager. This is a good moment to acknowledge the considerable contribution made by all the staff at RCM UK over the last few years, and particularly that of Rupert Marlow, who retired during the year. His wise counsel has been greatly appreciated. The Board would also like to thank SL Investment Management for their support, particularly during the last year when a number of factors have required them to provide additional in-depth actuarial analysis.

 



 

ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Chairman's Statement (continued)

For the year ended 30 June 2013

 

Outlook 

The market for TLIs continues to show signs of increased activity, with a number of new investors entering the market during the year.   Future investment performance of the Company will primarily be driven by the timing and frequency of mortalities in the portfolio.  However, the Board will continue to monitor market activity and consider policy sales should favourable opportunities arise.

 

The Company is now in a much more robust position than it was a year ago, being less exposed to gearing risk. If mortalities continue as predicted, returning funds to shareholders either directly or by buying back shares in the market may become a realistic possibility, subject to banking covenants. The agenda for the Annual General Meeting contains two significant items of Special Business: a vote to continue the Company and a vote to renew the Board's power to buy back shares in the market for a further year. I commend both of them to shareholders; holding policies to maturity should produce a better return than early sales and the purchase of shares is one constructive way in which the Board can begin to return capital to investors.

 

Charles Tracy

Chairman

1 October 2013

 

 



ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Investment Manager's Review

For the year ended 30 June 2013

 

Portfolio Overview

During the twelve month period from 1 July 2012 to 30 June 2013 there were seven confirmed policy maturities with a total face amount of $5.7m.  The seven maturities related to five individual lives, all of which were male.  As of 30 June 2013, 102 policies remained within the fund's portfolio with exposure to 90 individual lives. 

 

Cumulatively, as of 30 June 2013 there have been 45 policy maturities across 37 lives since inception.  Proceeds received from all maturities totals $74.6m, realising a $34.3m gain.  Thirteen policies have been sold since inception of the Company, generating proceeds of $11.2m (realising a $3.9m loss).  No policies were sold during the reporting period.

 

Four further maturities (two males, and two females) have been identified since the year end. The first maturity with a death benefit of $5.0m has been formally certified.  The gain was recognised in the July 2013 Net Asset Valuation and the cash proceeds were received in August 2013. The three other maturities, with a combined death benefit of $1.8m, have not yet been formally certified.  

 

Portfolio Summary

Face Value

$159.9m

Total number of Holding Life Companies

27



Face Weighted Averages




Male/Female Ratio at  purchase

65.8% / 34.2%

Age at purchase

81.7 years

LE at purchase

8.0 years



Current Male/Female Ratio

64.5% / 35.5%

Current Age

89.6 years

Current LE

5.1 years

 

Life Group (Parent Company) Distribution (Top 5)

Ranking by Valuation %

Parent Company

% Total Face Value

% Total Valuation

1

American International Group, Inc

21.6%

23.7%

2

Lincoln National Corporation

19.7%

18.1%

3

AEGON N.V.

14.4%

15.0%

4

Massachusetts Mutual Life Insurance Co

5.4%

7.1%

5

ING Groep N.V.

4.2%

5.8%

 

Credit Quality Distribution by Holding Life Company

AM Best Rating

% Total Face Value

% Total Valuation

A++

9.5%

11.0%

A+

56.9%

50.9%

A

28.3%

33.0%

A-

5.3%

5.1%

Total

100%

100%

 



 

ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Investment Manager's Review (continued)

For the year ended 30 June 2013

 

Distribution of Life Expectancy Estimates

The following table shows the distribution by death benefit of the policies in the portfolio by LE band. Policies are grouped by 6 month LE bands and the table shows the number of lives and the total death benefit in each group. The LEs are the valuation LEs used for the 30 June 2013 valuation.

 

It is important to note that the LE is an average of the estimated length of future lifetime for an individual with a given age and health status. The table is not therefore a prediction of when actual maturities will occur and is thus not a cash flow forecast.

 

LE bands

(years)

No. of Lives

Total Face Value

US$000

From

Up to

0

1.5

0

-

1.5

2

1

1,300

2

2.5

1

400

2.5

3

4

7,915

3

3.5

5

11,450

3.5

4

10

18,016

4

4.5

14

25,977

4.5

5

8

7,607

5

5.5

12

23,350

5.5

6

11

16,344

6

6.5

8

13,902

6.5

7

10

19,151

7

7.5

1

6,000

7.5

8

3

5,500

8+


2

3,000

Total


90

159,913

 

Premium Payments

Premiums remain the largest draw on the Company's cash.  As a result, it is important that premium streams are optimised such that AAO pays the minimum premium required to meet the cost of insurance required by the life company.  SL Investment Management continues the ongoing review of all policy statements to identify any scope for further optimisation of the premium payment schedules. Without further maturities, the expected cost of premiums for the twelve months to 30 June 2014 would be approximately $8.7m.

 

Policy Expiry Date Analysis

Written into the contract for some policies is an expiry date (a 'term out' date), after which no more premiums will be accepted by the life office and the death benefit will no longer be payable upon death.

 

Where applicable, this usually coincides with the policy anniversary closest to the insured's 100th  birthday. There are 49 such policies in the portfolio.

 

There are 8 policies with extension options to age 115 or 120, and 3 policies with 'partial' extensions - whereby the policy term is extended until death, but on a reduced death benefit after age 100.

 



 

ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Investment Manager's Review (continued)

For the year ended 30 June 2013

 

Policy Expiry Date Analysis (continued)

A summary of the policies in the portfolio as at 30 June 2013 is as follows:


Policies

Face amount

(US$'000)

%Face

30 June 2013 valuation (US$'000)

% Valuation

No extension

49

70,116

43.8%

24,691

44.1%

Extensions to age 115/120

8

10,700

6.7%

2,974

5.3%

Extension to death with reduced death benefit after age 100

3

6,500

4.1%

2,876

5.1%

No Expiry date

42

72,597

45.4%

25,482

45.5%

Total

102

159,913

100%

56,023

100%

 

Period Review and Outlook

This reporting period witnessed a lower volume of maturities compared with the previous twelve months.  This highlights a feature of this asset class; that the timing of mortalities is inherently unpredictable.  It should be noted that short term performance is driven not just by the frequency of maturities, but also the size of the policy maturities.

 

The average face value of the policies in the portfolio is $1.6m, but there is considerable variation in the size of individual face amounts.  The table below illustrates the distribution of the 90 lives in the portfolio by face value as at 30 June 2013.  Where a life insured represents more than one policy in the portfolio, the life is categorised according to the total face amount relating to that life:

Policy bands
(face value)

No. of lives

Total Face Value
US$000

Total Valuation US$000

% of valuation

From

Up to

$0m

$0.5m

14

4,889

1,898

3.4

$0.5m

$1m

17

10,244

3,368

6.0

$1m

$2.5m

36

51,888

17,559

31.3

$2.5m

$5m

13

41,151

14,189

25.3

$5m

$6.0m

10

51,741

19,009

34.0

Total

90

159,913

56,023

100.0

 

It can be seen that a significant proportion of the total death benefit is represented by a relatively small proportion of lives. 23 lives (26% of total lives) accounts for 58% of the total face value and 59% of the reported valuation.

 

Life expectancy (LE) assessments remain a key focus for the industry.  In January 2013 one of the major LE assessment companies, 21st Services, announced adjustments to its mortality tables citing advances in its underwriting methodology. 21st Services stated that the adjustments resulted in an extension to its LE estimates of 19% on average. 21st Services explained that the extensions were, in part, due to a change in the way insured lifestyle was taken into account, with more active insured's living longer even when suffering from serious health problems. 

 

The other two major LE underwriters did not adjust their LEs following the 21st Services announcement.  Shortly after the announcement, both companies stated that they had no plans to adjust their life expectancy estimates in the near future.

 



 

ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Investment Manager's Review (continued)

For the year ended 30 June 2013

 

Period Review and Outlook (continued)

Historically, the market has tended to favour LE assessments from 21st Services and AVS. However, industry reports show that LEs from Fasano are usually longer, i.e. more conservative. With this in mind, the Board has recently initiated a programme of LE updating for policies representing over $90m in face value (56% of the portfolio). LE assessments from all three major underwriters have been obtained.

 

In recent months, there have been strong signs of investment capital starting to return to the traded life market, with investors citing lack of policy supply as their primary concern.  It remains to be seen whether demand for policies will reach pre 2008 levels, or whether sustained demand will persuade brokers/suppliers to increase their marketing efforts to stimulate policy supply from US seniors. However, if demand continues to outweigh supply over the longer term, market IRRs are likely to fall and prices increase as a result.

It is likely that the buy and hold investment strategy adopted by the Company will remain optimal. However, market conditions will continue to be monitored closely to identify any favourable sales opportunities, should they arise.

 

With an average life insured age of nearly 90 years and an average life expectancy of five years, the Company holds a well-seasoned portfolio.  The total death benefit of the policies held in the portfolio is $159.9m versus a prevailing valuation of $56.0m.  The potential for investment gains over the next few years is therefore evident, although against this must be set the continuing obligation to pay premiums, which means that the later a policy matures, the higher its book cost.  The magnitude and timing of gains will ultimately depend on the mortality experience realised over the coming years. 

 

 

SL Investment Management

1 October 2013

 



ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Manager's Review

For the year ended 30 June 2013

 

Borrowings and investments

As of 30 June 2013, the Company had drawn down US$5.9 million of the US$15 million available for drawing down under the existing facility provided by AIB. This facility expires on 31 March 2014 and the further US$9.1 million available should provide the Company with enough cash to meet its obligations until then. It is expected that discussions with AIB as to the renewal of the facility beyond 31 March 2014 will start later this year.

 

The actual loan balance as of 30 June 2013 was US$5,939,000 compared with US$29,210,000 as of 30 June 2012. During the year, the Company drew down a total of US$10 million but repaid US$17,670,000 as a result of policy maturities and US$15,601,000 as a result of the share issue in November. Since the year end, a further US$2,000,000 has been drawn down and a further US$7,000,000 has been repaid.

 

The Company has sold its £100,000 holding of UK Treasury 4% 2016, as the Company no longer needs to generate securities income in order to qualify as an Investment Trust Company for tax purposes.

 

US dollar exposure

The Company no longer hedges its US dollar exposure, so the Company is fully exposed to the effect of exchange rates upon its net US dollar positions.

 

Change of Manager

Later this year RCM (UK) Limited ("RCM") will be succeeded as manager of the Fund (the "Manager") and as company secretary of the Fund (the "Company Secretary") by Allianz Global Investors Europe GmbH, acting by its UK branch ("AllianzGI Europe"). It is anticipated that the change of Manager and Company Secretary will become effective on or about 31 October 2013.

RCM and AllianzGI Europe are both wholly owned subsidiaries of Allianz Global Investors GmbH, a financial holding company supervised by the Bundesanstalt für Finanzdienstleistungsaufsicht ("BaFin"), and incorporated under the laws of Germany.

It is planned to merge RCM into AllianzGI Europe during the fourth quarter of 2013. The merger will take place pursuant to the European Cross-Border Merger Directive 2005/56/EC, as implemented in the UK and Germany. RCM will cease to exist as a separate corporate entity but its activities will generally continue as part of AllianzGI Europe's UK branch. On the basis that RCM will merge into and, as a matter of law, be succeeded as a legal entity by AllianzGI Europe, in a technical sense no "change" of Manager and of Company Secretary will take place.

As a result of the merger, AllianzGI Europe will become the Manager and the Company Secretary of the Fund and will succeed RCM as a party to agreements that it has entered into in connection with services that it provides to the Company including a management agreement, an investment management agreement and an administration and secretarial services agreement.

AllianzGI Europe's duties as the Manager and as the Company Secretary will be performed out of its UK branch and the same personnel will perform the relevant functions as they do currently.

 

 

RCM (UK) Limited

 

1 October 2013



ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Directors' Report

For the year ended 30 June 2013

 

The Directors have pleasure in submitting their Annual Financial Report for the year ended 30 June 2013 with comparatives for the year ended 30 June 2012.          

 

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 Company have been admitted to the Official List of the UK Listing Authority with a premium listing and to trading on the London Stock Exchange's main market for listed securities. 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 US Traded Life Interests ("TLIs").

 

Revenue, capital and dividends

The Statement of Comprehensive Income set out on page 28 shows a revenue deficit for the year amounting to £1,127,775 (2012: revenue deficit for the year £1,156,807). There was a capital deficit for the year amounting to £6,179,778 (2012: capital surplus for the year £2,754,640). The Directors have not paid an interim dividend (2012: nil) and do not propose the payment of a final dividend for the year (2012: nil).  

 

Assets                                                                                                             

At the year end the net assets attributable to the Shares were £34,907,478 (2012: £32,468,299). Based on this figure the net asset value of a Share in the Fund was 48.5p (2012: 81.2p).                                                                                                                                 

Share capital

During the year no Shares were repurchased.       Following a Placing and Open Offer 32,000,000 new Shares were issued on 5 November 2012.

 

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



15,599,798


21.67

AIB


8,325,000


11.56

Reliance Mutual Society Limited




4,320,000


6.00

Henderson Global Investors




3,600,000


5.00

Premier Fund Managers Limited




3,590,000


4.99

Rathbone Brothers Plc



2,743,400


3.81

 

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.

 

 

 



ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Directors' Report (continued)

For the year ended 30 June 2013

 

Directors

The Directors serving on the Board during the year, together with their beneficial interests and those of their families at 30 June 2013, were as follows:   




Shares


Shares




30 June 2013


30 June 2012

CPG Tracy (Chairman)

                    -


-   

DIW Reynolds


           59,600


42,000

SM Zein (resigned 20 February 2013)


                    -


-

JPHS Scott


         157,854


87,697

TJ Emmott (appointed 20 February 2013)


935,000*+


-

           

*  At date of appointment; 235,000 shares are non-beneficial interest

 

The Company has no formal service contracts with the Directors.

 

There were no third party indemnities in respect of the Directors for the current or prior period.         

 

In accordance with the Articles of Incorporation the Director retiring by rotation at the Annual General Meeting is Mr JPHS Scott. Mr TJ Emmott, having been appointed a Director since the date of the last Annual General  Meeting, offers himself for election as a Director.

 

The Board believes that Mr JPHS Scott, who has served for four years, is committed to his role as a non-executive Director and that his re-election would be in the interests of the Company. The Board also believes that Mr TJ Emmott, who has served for less than one year, is committed to his role as a non-executive Director and that his election would be in the interests of the Company.

 

Corporate Governance

The UK Corporate Governance Code ("the Code") was revised and published in September 2012 and applies to accounting periods commencing on or after 1 October 2012.   All companies with a Premium Listing of equity shares, regardless of whether they are incorporated in the UK or elsewhere (which includes the Company), are required to "comply or explain" against the Code.

 

Throughout the year ended 30 June 2013 the Company has been in compliance with the Main Principles of the UK Code, and has also complied with the detailed provisions set out in Section 1 of the UK Code, except as set out below.

 

The UK Code includes provisions relating to:

 

·      The role of chief executive

·      Executive remuneration, including the remuneration of executive directors

·      Appointment of a senior independent director

 

As permitted in the preamble to the UK Code, the Board considers these provisions are not relevant to the position of the Company. The Company is an externally managed investment company without executive staff; a senior independent director has not been appointed given that all Directors are independent of the Company and the key service providers.

 

On 30 September 2011, the Guernsey Financial Services Commission issued a new Code of Corporate Governance (the "Guernsey Code") which came into effect on 1 January 2012.

ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Directors' Report (continued)

For the year ended 30 June 2013

 

Companies which report against the Code are deemed to meet compliance with the Guernsey Code.

 

Statements of compliance

The Directors believe that the Company has complied throughout the year with the Main Principles of the UK Code where appropriate, and that it has also complied with the detailed provisions of the UK Code, except in so far as they relate to the role of the chief executive , the remuneration of executive staff and the appointment of a senior independent director; it has explained the reasons for non-compliance above. On that basis the Directors believe the Company to be compliant with the requirements of the UK Listing Authority Listing Rules as regards corporate governance.  

 

By reporting against the UK Code as outlined above, the Company is deemed to be compliant with the Guernsey 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 four 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 Director for the purpose of the Code.

 

The Directors have access to the advice and services of the Company Secretary, who is responsible to the Board for ensuring that the Board procedures are followed and that applicable rules and regulations are complied with.

 

The appointment of Directors is considered by the Board which carries out the functions of 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.

 

On appointment, the Manager and the Company Secretary provide all Directors with induction training.

 

The Board reviewed its performance and composition during the year, and was satisfied on both counts. In addition, it is considered that the performance of all Directors continues to be effective and that they have demonstrated commitment to their roles.

 

In order to review the effectiveness of the Board, the Committees and the individual Directors, the Chairman carried out a thorough appraisal process in 2013 in respect of the year under review.  The appraisal of the Chairman was carried out by the Board as a whole under the leadership of DIW Reynolds.

 

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 the investment management of the Fund's investments and to RCM (UK) Limited the management of the

ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Directors' Report (continued)

For the year ended 30 June 2013

 

The Board (continued)

cash and foreign exchange elements.  The safe custody of the Fund's investments is managed by Kleinwort Benson (Guernsey) Limited. Wells Fargo Bank in the USA acts as sub-custodian.  Kleinwort Benson (Channel Islands) Fund Services Limited are contracted to provide the Company's administration and accounting functions and Capita Registrars (Guernsey) Limited its registration function.  Since 1 September 2009 the secretarial function has been carried out by RCM (UK) Limited.

 

A summary of the terms of the agreements with SL Investment Management Limited and RCM (UK) Limited are set out in note 5 to the financial statements. After due consideration of the resources and reputation of SL Investment Management Limited and RCM (UK) Limited, the Board believes 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 Directors are 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, after seeking independent advice.     

 

Board Committees

The Board has established itself as an Audit Committee, which has defined terms of reference and duties.  This Committee meets when necessary, but at least twice a year, with the Auditor 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 the financial statements. This Committee is responsible for the review of the Annual Financial Report and half-yearly Financial Report, terms of appointment of the Auditor together with their remuneration, as well as the non-audit services provided by the Auditor.  It also meets with representatives of the Manager and Administrator and receives reports on the effectiveness of the Company's internal controls. Following a recommendation from the Audit Committee, the Board has concluded that there is no current need for the Company to have an internal audit function; all of the Company's management functions are delegated to the Manager, Administrator or Investment Manager, all of whom have their own compliance departments. The Chairman of the Audit Committee is DIW Reynolds.

 

The Audit Committee also reviews any non-audit services provided by the Auditor.  Such services have normally been limited to the provision of advice on tax compliance. The non-audit fees, being fees for reporting accountant services in respect of the Placing and Open Offer, amounted to £50,000 (2012: £3,800) compared with audit fees of £23,933 (2012: £27,300). Non-audit services are pre-approved by the Audit Committee after they are satisfied that relevant safeguards are in place to protect Auditor objectivity and independence. As such, the Audit Committee is satisfied that the provision of such advice does not in any way prejudice the objectivity and independence of the Auditor.

 

The Audit Committee reviews cost-effectiveness and quality of the external audit on an annual basis and opens the role of Auditor to tender when appropriate.  During the course of the external audit, the Audit Committee discusses with the Auditor any findings or issues that may arise, without the presence of the Manager or Investment Manager, if required.



 

ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Directors' Report (continued)

For the year ended 30 June 2013

 

The Board (continued)

The Board carries out the functions of a Nominations Committee and makes recommendations on the appointment of new Directors. The Committee meets at least annually to ensure that the Board has a balance of skills to carry out its fiduciary duties and to select and appoint suitable candidates for appointment when necessary. A variety of sources, including the use of external search consultants, may be used to ensure that a wide range of candidates is considered.  The Board has decided not to establish Remuneration and Management Engagement Committees 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.

 

The terms of reference for the Audit Committee are available for inspection on the Company's website, www.allianzgi.co.uk/TLI or available on request from the Company Secretary.

 

The emoluments of the Directors for the year were as follows:






30 June 2013


30 June 2012






£


£

CPG Tracy (Chairman)



26,250*


20,000

DIW Reynolds




22,500*


17,500

SM Zein





14,558*


15,000

JPHS Scott





20,000*


15,000

TJ Emmott





            5,404*


-






88,712-


67,500

* Includes one-off additional payments of £5,000 per Director to reflect  the extra work done during the year in relation to the share issue and related matters.                                                                                                         

The figures above represent emoluments earned as Directors during the relevant financial year. The Directors receive no other remuneration or benefits from the Company other than the fees stated above.

 

In the year to 30 June 2013 Directors were paid at the rate of £15,000 per annum with the Chairman of the Board receiving an extra £5,000 per annum and the Chairman of the Audit Committee an extra £2,500 per annum. With effect from 1 January 2013 the additional fees payable to the Chairman of the Board were increased to £7,500 per annum; fees for other Directors are unchanged at £15,000. Per note 6 to the financial statements the Directors' fees and expenses of £92,948 (2012: £76,852) included allowable expenditure of £4,236 (2012: £7,877) and employers' national insurance.

 

The number of formal meetings of the Board and the Audit Committee held during the financial year and the attendance of individual directors and members of the Audit Committee are shown below:

 


Board

Audit Committee

No. of meetings in the year

6

2

CPG Tracy

6

2

DIW Reynolds

6

2

JPHS Scott

5

1

SM Zein

4

1

TJ Emmott

3

1

 



 

ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Directors' Report (continued)

For the year ended 30 June 2013

 

Relations with shareholders   

The Board regularly monitors the shareholder profile of the Company.  It aims to provide shareholders with a full understanding of the Company's activities and performance, and reports formally to shareholders twice a year by way of the Annual Financial Report and the half yearly Financial Report.  This is supplemented by the monthly publication, through the London Stock Exchange, of the net asset value of the Company's shares and the publication twice yearly of Interim Management Statements.

 

All shareholders are encouraged to participate in the Company's Annual General Meeting, which is being held this year on 13 November at 1.30pm. 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, as amended. 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. Total borrowings under the agreement with AIB decreased to circa US$5.9 million as at 30 June 2013 from circa US$29.2 million as at 30 June 2012. At this level the margin of cover required under the agreement was comfortably met.

 

On 30 October 2012, the Company signed a renewal of the loan agreement with AIB up to 31 March 2014, which will cover the Company's cash flow requirements up to that date.

 

The Board has considered the position should AIB not renew the agreement beyond March 2014. Acknowledging that this might involve the forced sale of policies in an illiquid market, the Board is nevertheless confident that the sales required to cover outstanding borrowings could be completed.  To the extent that the prices achieved did not match those in the valuation, the net asset value of the Company could be adversely affected, but the Company would remain a going concern.

 

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 and the Board is satisfied with their effectiveness.

 

 



 

ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Directors' Report (continued)

For the year ended 30 June 2013

 

Accountability and audit (continued)

 

c)         Internal control (continued)

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 and Manager would be excluded from that discussion. The Audit Committee reviews the scope and results of the external audit, its cost effectiveness, the balance of audit and non-audit services and the independence and objectivity of the external Auditor.  In the Directors' opinion the Auditor is considered independent.

 

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.

 

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 20 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

 

ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Directors' Report (continued)

For the year ended 30 June 2013

 

Market price and longevity risk (continued)

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.

 

Discount rate risk

Depending on supply and demand in the TLI market, there is a risk the IRR of 12% currently being used for valuation purposes may no longer be appropriate.

 

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 assets were maintained in sterling. Funds required for investment were converted into US dollars and would remain in US dollar assets until their expected conversion into sterling as the portfolio matured. The Company's policy historically was to hedge its US dollar net asset exposure, but, following the special resolution passed at an Extraordinary General Meeting on 20 September 2011, this policy no longer applies and the Company has closed out its foreign currency contracts.

 

Continuation of the Company

The Company was incorporated in 2004 with a fixed life with an expected winding up date of 31 March 2012. At an Extraordinary General Meeting of the Company held on 28 August 2009, a Special Resolution was passed by shareholders to adopt a new Memorandum and Articles of Incorporation. As a result, Article 44.1 of the Company's Articles of Incorporation now gives shareholders the right to vote at the Annual General Meeting to be held in 2013 and at every Annual General Meeting thereafter, on whether to continue the business of the US Traded Life Interests Fund of the Company.

 

The Directors wish to draw Shareholders' attention to Resolution 6 in the Notice of Annual General Meeting, which proposes that the business of the US Traded Life Interests Fund of the Company be continued until the Annual General Meeting to be held in 2014.

 

Auditor

A resolution to re-appoint Deloitte LLP as Auditor 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 each Director is 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, as amended.

 

By order of the Board.

 

 

 

JPHS Scott                                           DIW Reynolds

Director                                                 Director

1 October 2013



ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Directors' Responsibilities Statement

For the year ended 30 June 2013

 

The Directors are responsible for preparing the Annual Financial Report and the financial statements in accordance with applicable law and regulations.

 

Company law requires the Directors to prepare financial statements for each financial year.  Under that law the Directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards (IFRSs).  Under company law the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, International Accounting Standard 1 requires that Directors:

 

·              properly select and apply accounting policies;

·              present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

·              provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance; and

·              make an assessment of the company's ability to continue as a going concern.

 

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with The Companies (Guernsey) Law, 2008, as amended.  They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

 

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website.  Legislation in Guernsey and the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

Responsibility statement

We confirm that to the best of our knowledge:

 

·      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.

·      the Investment Manager's Review and Director's Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties the Company faces.

 

 

By order of the Board.

 

 

 

JPHS Scott                                           DIW Reynolds

Director                                                 Director

 

 

1 October 2013

 



 

ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Independent Auditor's Report to the Members of Alternative Asset Opportunities PCC Limited

For the year ended 30 June 2013

 

We have audited the financial statements of Alternative Asset Opportunities PCC Limited for the year to 30 June 2013 which comprises the Statement of Comprehensive Income, the Statement of Financial Position, the Statement of Changes in Redeemable Participating Preference Shareholders' Funds, the Statement of Cash Flows, the Portfolio Statement and the related notes 1 to 22. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards ("IFRSs").

 

This report is made solely to the Company's members, as a body, in accordance with Section 262 of The Companies (Guernsey) Law, 2008, as amended.  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 auditor's 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 Auditor

As explained more fully in the Directors' Responsibilities Statement, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.

 

Scope of the audit of the financial statements

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Company's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

 

Opinion on financial statements

In our opinion the financial statements:

·              give a true and fair view of the state of the Company's affairs as at 30 June 2013 and of its loss for the year then ended;

·              have been properly prepared in accordance with IFRSs; and

·              have been prepared in accordance with the requirements of The Companies (Guernsey) Law, 2008, as amended.

 

Emphasis of matter

In forming our opinion on the financial statements, which is not modified, we have considered the adequacy of the disclosure in;

 



 

·      note 2 (b) of the financial statements, which concerns the Company's actuarial valuation model applied in determining the fair value of its Traded Life Interests ("TLIs).    The methodology adopted by the Directors is on the basis that these investments are intended to be held to maturity and makes assumptions over life expectancies and discount rates.  By their nature, assumptions over life expectancies are uncertain and due to the low levels of trading in TLIs there is also uncertainty over the estimation of market based discount rates.  For these reasons note 2 (b) to the

ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Independent Auditor's Report to the Members of Alternative Asset Opportunities PCC Limited (continued)

For the year ended 30 June 2013

 

Emphasis of matter (continued)

 

financial statements highlights that these valuation are materially higher than the expected realisable value of these investments in a short term sale.

 

·      note 2 (c) of the financial statements, which concerns the Company's renegotiation of its borrowing facilities, which have been renewed until 31 March 2014. Whilst the Board is confident that the loan will be extended beyond that date to allow sufficient funding to meet ongoing premium commitments arising from the TLI portfolio, there is no certainty that the extension will be approved, at which point the Company would need to realise a proportion of its TLI portfolio to continue as a going concern.  The expected proceeds receivable in such a situation are materially lower than the carrying value in the financial statements.  The financial statements have not made any adjustment to the valuation of the TLI portfolio that would be required under this future scenario as no decision to sell the portfolio has been made.

 

Whilst it is not possible to quantify the effects of these uncertainties on the financial statements, the Chairman's Statement on page 10 and note 20 discloses a sensitivity analysis in respect of both the life expectancies and discount rate assumptions which quantifies the effect on the Company's net asset value per share for the selected range of scenarios.  In this respect, the higher IRR scenarios are likely to better represent the realisable value of investments in a short term sale.

 

Matters on which we are required to report by exception

We have nothing to report in respect of the following:

 

Under The Companies (Guernsey) Law, 2008, as amended we are required to report to you if, in our opinion:

·              adequate accounting records have not been kept; or

·              the financial statements are not in agreement with the accounting records and returns; or

·              we have not received all the information and explanations we require for our audit.

 

Under the Listing Rules we are required to review:

·              the part of the Corporate Governance Statement relating to the Company's compliance with the nine provisions of the UK Corporate Governance Code specified for our review.

 

 

 

 

 

 

 

 

Richard Garrard

for and on behalf of Deloitte LLP

Chartered Accountants and Recognised Auditor

St. Peter Port

Guernsey

1 October 2013

 

 



ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Statement of Comprehensive Income

For the year ended 30 June 2013

 


Notes

Year to 30 June 2013


Year  to 30 June 2012





Revenue

Capital

Total


Revenue

Capital

Total





£

£

£


£

£

£












Operating income/(losses)








Net (losses)/gains on investments

 

10

-

(6,378,059)

(6,378,059)


-

4,114,252

4,114,252

Foreign exchange gains/(losses)

 

17

-

198,281

198,281


 

-   

(1,359,612)

(1,359,612)

Interest and similar income

4

3,775

-

3,775


4,205

-

4,205

Total income/(losses)


3,775

(6,179,778)

(6,176,003)


4,205

2,754,640

2,758,845











Operating expenses










Management fee


5

(146,320)

-

(146,320)


(122,657)

-

(122,657)

Investment manager's fee

5

(156,423)

-

(156,423)


(123,010)

-

(123,010)

Custodian fee


(18,289)

-

(18,289)


(15,908)

-

(15,908)

Other expenses

6

(338,854)

-

(338,854)


(384,495)

-

(384,495)












Total operating expenses before finance costs


(659,886)

-

(659,886)


 

(646,070)

-

(646,070)










Operating (loss)/profit before finance costs


(656,111)

(6,179,778)

(6,835,889)


 

(641,865)

2,754,640

2,112,775












Finance costs









Loan interest payable

14

(471,664)

-

(471,664)


(514,942)

-

(514,942)












Net (deficit)/surplus



(1,127,775)

(6,179,778)

(7,307,553)


(1,156,807)

2,754,640

1,597,833











(Deficit)/surplus per redeemable share

 

8

(1.86p)

(10.17p)

(12.02p)


 

(2.89p)

6.89p

4.00p

           

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 33 to 50 are an integral part of these financial statements.

ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Statement of Financial Position

As at 30 June 2013





Notes


2013


2012







£


£







Non-current assets






Financial assets at fair value through profit or loss

10


36,937,381


41,813,775










Current assets








Cash and cash equivalents


12


1,072,662


558,411

Other receivables


11


6,685


16,687

Maturity proceeds receivable


11


988,989


8,926,008
















2,068,336


9,501,106










Total assets





39,005,717


51,314,881










Current liabilities






Loan facility


14


3,915,675


18,623,654

Other payables


13


182,564


222,928




4,098,239


18,846,582







Total liabilities





4,098,239


18,846,582










Net assets attributable to shareholders

17


34,907,478


32,468,299










Total equity and liabilities (including amounts due to shareholders)



39,005,717


51,314,881



















Net asset value per share

9


48.5p


81.2p

 

These financial statements were approved by the Board of Directors on 1 October 2013.

 

Signed on behalf of the Board.

 

 

 

 

 

JPHS Scott                                           DIW Reynolds                                     

Director                                                 Director

 

 

1 October 2013

 

 

 

 

 

 

 

 

The notes on pages 33 to 50 are an integral part of these financial statements.

ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Statement of Changes in Redeemable Participating Preference Shareholders' Funds

For the year ended 30 June 2013

 











For the year ended 30 June 2013

Share

Premium


Capital

reserve


Revenue

reserve


 

Total




£


£


£


£











Balance as at 1 July 2012

39,168,236


970,102


(7,670,039)


32,468,299











Deficit for the year

-   


(6,179,778)


(1,127,775)


(7,307,553)











Issue of shares

shares


9,746,732


-


-


9,746,732











Balance as at 30 June 2013

48,914,968


(5,209,676)


(8,797,814)


34,907,478

 











For the year ended 30 June 2012

Share

Premium


Capital

reserve


Revenue

reserve


 

Total




£


£


£


£











Balance as at 1 July 2011

39,168,236


(1,784,538)


(6,513,232)


30,870,466











Surplus/(deficit) for the year

-   


2,754,640


(1,156,807)


1,597,833











Balance as at 30 June 2012

39,168,236


970,102


(7,670,039)


32,468,299

 

 

 

 

 

 

 

 

 

The notes on pages 33 to 50 are an integral part of these financial statements.



ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Statement of Cash Flows

For the year ended 30 June 2013

 








Year  to

 30 June 2013


Year  to

 30 June 2012








£


£

Cash flows from operating activities




Revenue account operating loss before finance costs for the year

(656,111)


 

(641,865)

Decrease/(increase) in other receivables

7,947,021


(8,920,852)

Decrease in other payables


(40,365)


(6,509,298)

Premiums paid






(5,237,071)


(5,326,029)

Proceeds from maturity and sale of investments

3,735,406


17,654,023











Net cash inflow/(outflow) from operating activities before interest

5,748,880


(3,744,021)











Cash flows from financing activities





Net (repayment)/receipt of borrowings

(14,707,979)


5,484,265

Interest paid







(471,664)


(514,942)

Shares issued





9,746,732


-

Net cash used in financing activities

(5,432,911)


4,969,323





















Net increase/(decrease) in cash and cash equivalents

315,969


1,225,302

Cash and cash equivalents at the beginning of the year

558,411


692,721

Effects of foreign exchange




198,282


(1,359,612)











Cash and cash equivalents at the end of the year

1,072,662


558,411

 

 

 

 

 

 

 

 

The notes on pages 33 to 50 are an integral part of these financial statements.



ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Portfolio of Investments

As at 30 June 2013

 

 

 

Traded Life Interests ("TLI's")

 

Number

of Policies


 

 

Valuation


Portion of

Portfolio


 

A.M. Best

Rating *







£


%



Issuer








American General Life Insurance Company (TX)

12


8,742,829


23.67%


A

Lincoln National Life Insurance Co

14


6,400,310


17.33%


A+

Transamerica Life Insurance Company

18


5,550,603


15.03%


A+

Massachusetts Mutual Life Insurance Co

5


2,623,512


7.10%


A++

MetLife Insurance Company of Connecticut

6


1,738,071


4.71%


A+

Security Life of Denver Insurance Co

1


1,712,269


4.64%


A

John Hancock Life Insurance Company USA

7


1,690,706


4.58%


A+

New York Life Insurance and Annuity Corp

5


1,435,091


3.89%


A++

Aviva Life and Annuity Company

4


1,413,671


3.83%


A-

Pacific Life Insurance Company

4


851,422


2.31%


A+

Genworth Life Insurance Company

1


837,090


2.27%


A

Columbus Life Insurance Company

2


591,377


1.60%


A+

Lincoln Benefit Life Company

1


414,297


1.12%


A+

North American Company for L & H Ins

2


372,547


1.01%


A+

MONY Life Insurance Company of America

1


329,871


0.89%


A

AXA Equitable Life Insurance Company

3


321,583


0.87%


A+

Aviva Life and Annuity Company of NY

2


298,951


0.81%


A-

Lincoln Life & Annuity Company of NY

1


278,629


0.75%


A+

United of Omaha Life Insurance Company

2


277,202


0.75%


A+

Banner Life Insurance Company

2


250,142


0.68%


A+

ING Life Insurance and Annuity Company

2


227,193


0.62%


A

ReliaStar Life Insurance Company

2


217,021


0.58%


A

Standard Insurance Company

1


136,161


0.36%


A

Security Mutual Life Insurance Co of NY

1


133,894


0.35%


A-

General American Life Insurance Company

1


54,893


0.15%


A+

Beneficial Life Insurance Company

1


38,046


0.10%


A-

Jackson National Life Insurance Company

1


-


0.00%


A+
















102


36,937,381


100.0%






















Portfolio Total



36,937,381


100.0%



 

 

 

 

 

 

 

 

 

 

 

 

 

*    As at 30 June 2013



ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Notes to the Financial Statements

For the year ended 30 June 2013

 

1          Principal activity

The Company is a Guernsey registered closed-ended protected cell company established with one cell known as the US Traded Life Interests Fund (the "Fund" or "Cell"). The redeemable preference shares (the "Shares") in the Company have been admitted to the Official List of the UK Listing Authority with a premium listing and to trading on the London Stock Exchange's main market for listed securities. The Company's objective in respect of the Fund is to provide investors with an attractive capital return through holding to maturity (or until the end of the life of the Fund), a diversified portfolio of US Traded Life Interests ("TLIs"), notwithstanding the Company may make sales of selected policies from time to time.

 

2          Principal Accounting Policies

(a)  Basis of preparation       

 

Statement of compliance

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB) 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.    

 

Basis of measurement              

The financial statements have been prepared under the historical cost convention as modified by the revaluation of investments and derivatives, as detailed above.

 

The financial statements have been prepared on a total company basis and not on a cell-by-cell basis as there is currently only one cell. The only non-cellular assets and liabilities are in respect of the two management shares of no par value issued at £1 each fully paid represented by cash at bank. As they are immaterial they have been excluded from the financial statements.

 

Functional and Presentational Currency

The financial information shown in the financial statements is shown in sterling, being the Company's functional and presentational currency.

 

Critical accounting judgements and key sources of estimation uncertainty

The preparation of Financial Statements in conformity with IFRSs 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.  Such judgements and key sources of estimation uncertainty include the valuation of investments and the going concern assumption, which are discussed in note 2(b) and 2(c) respectively.

 

 



ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Notes to the Financial Statements (continued)

For the year ended 30 June 2013

 

2          Principal Accounting Policies (continued)

(a)  Basis of preparation (continued)  

 

Adoption of new and revised standards

 

In the current year, the Company has not adopted any new or revised standards that have had a material impact on the financial statements.

 

At the date of authorisation of these financial statements, the following standards and interpretations which have not been applied in these financial statements were in issue but not yet effective.

 

IFRS 9 "Financial Instruments"

IFRS 10 "Consolidated Financial Statements"

IFRS 11 "Joint Arrangements"

IFRS 12 "Disclosure of Interests in Other Entities"

IFRS 13 "Fair Value Measurement"

IAS  1 (amended) "Presentation of items of other comprehensive income"

IAS 12 (amended) "Deferred Tax: Recovery of Underlying Assets"

IAS 19 (amended) "Employee benefits"

IAS 24 (amended) "Related Party Disclosure"

IAS 27 (amended) "Separate Financial Statements (2011)"

IAS 28 "Investments in Associates and Joint Ventures (2011)"

IAS 32 (amended) "Classification of Rights Issue"

IFRIC 19 "Extinguishing Financial Liabilities with Equity Instruments"

IFRIC 14 (amended) "Prepayments of a Minimum Funding Requirement"

 

The Directors do not expect that the adoption of the standards listed above will have a material impact on the financial statements of the Company in future periods.

 

(b)        Valuation of Investments

 

            US Traded Life Interest Investments

 

The Company primarily 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 TLI investments are classified as fair value through profit and loss on initial recognition.

 

Recognition and basis of measurement

Purchases of TLIs are recognised on a trade date basis and are initially held at cost, being the consideration given.

 

Valuation

As the market for TLIs is thin, and there is little published information on these investments, there are no reliable market prices.  The TLIs 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 present value of its net expected future cash flows. The calculation uses the following data and assumptions provided by third party LE underwriters, the Investment Manager (or the Directors, where stated):

 



 

ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Notes to the Financial Statements (continued)

For the year ended 30 June 2013

 

2          Principal Accounting Policies (continued)

(b)        Valuation of Investments (continued)       

·      Death benefit payable under the policy;   

·      Mortality using the 2008 Valuation Basic Table (Ultimate) and the most recent life expectancy for each policy;

·      Premiums payable under the policy; and 

·      An estimate of a market based discount rate derived by the Directors.

 

If the most recent life expectancy was obtained prior to 1 April 2013 then that life expectancy has been uplifted by an adjustment factor or 12%, as explained in the Chairman's statement.

 

There is inherent uncertainty within this basis of valuation and this valuation may be materially different from either the value on maturity or the realisable sale value of these investments.

 

United Kingdom Gilts

The Company also invested in a United Kingdom Gilt ("UK Gilt") which it intended to hold to maturity or until the end of the life of the Fund. The UK Gilt was classified as fair value through profit and loss on initial recognition. During the year under review the UK Gilt was sold.

 

Recognition and basis of measurement

Purchases of UK Gilts are recognised on a trade date basis and are initially held at cost, being the consideration given.

 

Valuation

The UK Gilt was valued monthly at the clean bid market price available at each valuation date. Accrued interest was included within sundry debtors.

 

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. TLI investments are de-recognised on the date of death of the insured or on the trade date if a policy is sold.     

 

(c)        Going concern

The Board considered carefully the issue of 'going concern', specifically in relation to the availability of funding. Total borrowings under the agreement with AIB reduced to circa US$5.9 million as at 30 June 2013 from circa US$29.2 million as at 30 June 2012. At this level the margin of cover required under the agreement was comfortably met.

 

On 30 October 2012, the Company signed a renewal of the loan agreement with AIB up to 31 March 2014, which is designed to cover the Company's cash flow requirements up to that date, even if no policies mature. The Board has considered the position should AIB not renew the agreement beyond 31 March 2014. Acknowledging that this might involve the sale of policies in an illiquid market, the Board is nevertheless confident that the sales required to cover outstanding borrowings could be completed. To the extent that the prices achieved did not match those in the valuation, the net asset value of the Company would be adversely affected, but the Company would remain a going concern.

 



ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Notes to the Financial Statements (continued)

For the year ended 30 June 2013

 

2          Principal Accounting Policies (continued)

A continuation vote will be put to the Shareholders at the 2013 Annual General Meeting. While the Directors cannot be certain what the result of this vote will be, the financial statements are prepared on a going concern basis supported by the Directors' current assessment of the Company's ability to continue in existence for the foreseeable future and shareholder interest in the continuation of the Company. Based on the above, the Directors have reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future, and they continue to adopt 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 Statement of Comprehensive Income - revenue account.

 

(f)         Foreign exchange

Foreign currency monetary assets and liabilities are translated into sterling at the rate of exchange ruling at the reporting 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 Statement of Comprehensive Income and in the capital reserve - realised, and capital reserve - unrealised, respectively.

 

(g)        Bank borrowings

Interest bearing bank loans and overdrafts are recorded when the proceeds are received. Interest payments are recognised in the Statement of Comprehensive Income in the period in which they are incurred.

 

 

3          Segmental Reporting

The Board has considered the requirements of IFRS 8 'Operating Segments'. The Board has determined that the Company is engaged in a single segment of business, being investment in a portfolio of TLIs. The Board, as a whole, has been determined as constituting the chief operating decision maker of the Company.

           

The Board has overall responsibility for the assets of the Company in accordance with the investment objective and policy, and subject to advice received from the Investment Manager.

 

Whilst the Investment Manager may make the investment decisions on a day-to-day basis, any changes to the investment strategy or major allocation decisions have to be approved by the Board, even though they may be proposed by the Investment Manager. The Board therefore retains full responsibility as to the investment strategy or major allocation decisions. The Investment Manager is required to act under the terms of the prospectus which cannot be radically changed without the approval of the Board and the shareholders.

 

The key measure of performance used by the Board to assess the Company's performance and to allocate resources is the total return of the Company's net asset value, as calculated under IFRS, and therefore no reconciliation is required between the measure of profit or loss used by the Board and that contained in the financial statements.

 



ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Notes to the Financial Statements (continued)

For the year ended 30 June 2013

 

4          Interest and similar income




Year to

30 June 2013


Year to

30 June 2012




£


£







Bank deposit interest


774


216

Bond interest

3,001


3,989







Total income

3,775


4,205

 

 

5          Investment management and management fees

SL Investment Management Limited, the Investment Manager, was appointed under an agreement with the Company and other parties dated 16 March 2004, as amended and restated on 20 July 2004. The agreement may be terminated by either party giving not less than 12 months notice or shorter notice as the parties may agree to accept.

 

From 1 September 2009 the fee payable to the Investment Manager is 0.475% per annum of the Company's Gross Assets. With effect from 1 April 2012 the fee was reduced to 0.4% per annum of the Company's Gross Assets.

 

RCM (UK) Limited, the Manager, was appointed under an agreement with the Company dated 16 March 2004 to manage the fixed interest and near cash assets of the Company in accordance with the investment policy and to implement the currency hedging facility from time to time approved by the Directors. Either party giving not less than 12 months notice may terminate the agreement.

 

The fee payable to the Manager is 0.4% per annum of the Company's Gross Assets and a fixed fee of £20,000 per annum for the provision of Administration and Secretarial Services. With effect from 1 July 2013 the fee payable to the Manager was reduced to 0.3% per annum of the Company's Gross Assets. From the same date the fixed fee for the provision of Administration and Secretarial Services was increased from £20,000 to £30,000 per annum.

 

With effect from 1 September 2009 the fixed fee payable under Administration Agreement between the Company and Kleinwort Benson (Channel Islands) Fund Services Limited (formerly Kleinwort Benson (Guernsey) Fund Services Limited) is £50,000 per annum.

 

 



ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Notes to the Financial Statements (continued)

For the year ended 30 June 2013

 

6          Other expenses





Year to

30 June 2013


Year to

30 June 2012





£


£








Administration and accountancy fees


49,699


37,085

Secretarial fees



19,936


20,001

Broker fees



48,413


31,444

Directors' fees,  national insurance and expenses

92,948


76,852

D&O Insurance



10,364


7,546

Auditor's remuneration



23,933


31,094

Legal and professional fees


10,099


23,652

Printing




9,355


4,392

Safe custody fees



17,159


22,178

Bank fees and charges



315


29,191

Registrar fees



15,073


9,438

Cost of obtaining new LEs


16,269


56,437

Sundry expenses *



25,291


35,185








 

* Sundry expenses include mailing services, tax exempt fees, stock exchange fees and other sundry costs.

 

7          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 £600 which is included in sundry expenses.

 

The Company adopted 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 as an investment trust under Section 1158 of the Corporation Tax Act 2010. As an investment trust, the Company is subject to corporation tax on its income, but no corporation tax is provided for in these accounts, as the Company has significant unutilised tax losses which are not deemed to be recoverable. The Company was approved by HM Revenue & Customs as an investment trust in accordance with Section 1158 of the Corporation Tax Act 2010 for the year to 30 June 2012. 

 

Under the new investment trust regime rules affecting accounting periods commencing on or after 1 January 2012 an initial application must be submitted to HM Revenue & Customs for entry into the regime and the Company must thereafter demonstrate annually compliance with the regulations. In December 2012 the Company received confirmation from HM Revenue & Customs as an approved investment trust for accounting periods commencing on or after 1 July 2012 subject to the Company continuing to meet the eligibility conditions at Section 1158 Corporation Tax Act 2010 and the ongoing requirements in Chapter 3 of Part 2 Investment Trust (Approved Company) Tax Regulations 2011 (Statutory Instrument 2011/2999).

 

 



 

ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Notes to the Financial Statements (continued)

For the year ended 30 June 2013

 

 

8          Return per share

Revenue deficit per Share is based on the net deficit attributable to the Shares of £1,127,775 (2012: deficit £1,156,807) and on the average number of Shares in issue of 60,778,082 (2012: 40,000,000). Capital deficit per Share is based on the net capital return attributable to the Shares of £6,179,778 (2012: return £2,754,640) and on the average number of Shares in issue of 60,778,082 (2012: 40,000,000).

 

9          Net Asset Value per Share

The diluted and undiluted net asset value per Share is based on net assets attributable to the Shares of £34,907,478 (2012: £32,468,299) and on the 72,000,000 (2012: 40,000,000) Shares in issue at the year end.

 

10         Investments    

(a)   Investments at fair value through profit or loss

Year to

 30 June 2013


Year to

 30 June 2012






£


£

Movements in the year:




Opening valuation


41,813,775


50,027,517

Premiums paid

5,237,071


5,326,029

Proceeds from the maturity and sale of investments

(3,735,406)


(17,654,023)

Net realised gain on maturities

1,139,032


2,471,093

Movement in unrealised (depreciation)/appreciation on revaluation of investments




(7,517,091)


1,643,159

Closing valuation



36,937,381


41,813,775









Comprising:







Closing book cost



50,610,534


47,969,837

Closing unrealised loss

(13,937,381)


(6,156,062)

Closing valuation



36,937,381


41,813,775

 

 

(b)   Net gain/(loss) on investments held at fair value through profit or loss


Year to

30 June 2013


Year to

30 June 2012







£


£










Net realised gain on maturities



1,139,032


2,471,093










Movement in unrealised depreciation on revaluation of investments

(7,517,091)


1,643,159







(6,378,059)


4,114,252

 

 



 

ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Notes to the Financial Statements (continued)

For the year ended 30 June 2013

 

(c) Derivative financial instruments
















There were no open forward currency contracts as at 30 June 2013 and as at 30 June 2012.









 

11         Other receivables and maturity proceeds receivable





30 June 2013


30 June 2012





£


£








Sundry debtors



6,685


16,687

Maturity proceeds receivable



988,989


8,926,008





995,674


8,942,695

 

The carrying value for the current and prior year is materially the same as the fair value.

 

12         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. The carrying value for the current and prior year is materially the same as the fair value.

 

13         Other payables




30 June 2013


30 June 2012




£


£







Accrued expenses

182,564


222,928




182,564


222,928

 

The carrying value for the current and prior year is materially the same as the fair value.

 

14         Loan facility

As at 30 June 2013 the Company's drawings on its loan agreement with AIB were US$nil (2012: US$27.5 million) on the term loan and US$5.9 million (2012: US$1.7 million) on the revolving credit facility. Interest is payable at LIBOR plus 4.0% (2012: 4.0%) on the term loan and the revolving credit facility. As at 30 June 2013 a total of US$5,938,906 (£3,915,675) was outstanding (2012: US$29,210,276 (£18,623,654)). On 30 October 2012, the Company signed a renewal of the loan agreement with AIB up to 31 March 2014. This will allow the Company to continue fulfilling its obligations, including the payment of premiums until that date.

 

Under the loan agreement, the primary covenant obliges the Company to maintain cover (i.e. asset value, subject to certain adjustments, divided by borrowings) above 2.5 times. The current cover ratio, based upon the restated asset valuation at 30 June 2013, is 9.4 times (2012: 1.5times).

           

15         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.

 



 

ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Notes to the Financial Statements (continued)

For the year ended 30 June 2013

 

15         Share capital and share premium (continued)           

The two Management Shares were issued at £1 each fully paid and are beneficially owned by the Manager.  The Management Shares do not carry any rights to dividends and holders of Management Shares are only entitled to participate in the non-cellular assets of the Company on a winding-up.

 

40,000,000 Shares were issued in the Fund at £1 per Share on 25 March 2004. The issue costs incurred of £831,764 were debited against the share premium account to leave net proceeds of the share issue of £39,168,236.

 

Following a Placing and Open Offer a further 32,000,000 Shares were issued on 5 November 2012. The issue costs incurred of £493,268 were debited against the share premium account to leave proceeds of the share issue of £9,746,732.

 

The holders of Shares attributable to the Fund will be entitled to participate only in the income, profits and assets            attributable to that fund. On winding up the holders of Shares are entitled to participate only 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.  Shareholders shall be offered the opportunity to vote on the continuation of the Fund at the Annual General Meeting in 2013 and annually thereafter.

 

16         Share buy-backs

By way of an ordinary resolution passed at the Annual General Meeting held on 14 November 2012, the Company took authority to make market purchases of fully paid Shares, provided that the maximum number of Shares authorised to be purchased would be no more than 5,996,000 Shares or such number as represented 14.99 per cent. of the Shares in issue as at the date of the Annual General Meeting, whichever was less (in either case, excluding Shares held in Treasury). The Company will be seeking to renew this authority at the forthcoming Annual General Meeting. Such authority will expire on the date of the next Annual General Meeting, unless  previously renewed, varied, or revoked prior to such date by a special resolution of the Company in general meeting. During the year under review no Shares were bought back for cancellation (2012: nil).

 

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 shall be the higher of (1) not more than 5% above the average of the middle market quotations for a Share in the Company as derived from The Stock Exchange Daily Official List for the five business days immediately preceding the day on which such share is contracted to be purchased, and (2) the higher of the price of the last independent trade and highest current independent bid on the relevant market when the purchase is carried out, provided that the Company shall not be authorised to acquire Shares at a price above the estimated prevailing net asset value per Share on the date of purchase.

 



 

ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Notes to the Financial Statements (continued)

For the year ended 30 June 2013

 

17         Net assets attributable to shareholders






Share Premium


Capital

Reserves


Revenue

Reserves


 

Total






2013


2013


2013


2013






£


£


£


£













Balance at 1 July 2012

39,168,236


970,102


(7,670,039)


32,468,299

Net realised gain on maturities

-


1,139,032


-


1,139,032

Movement in unrealised depreciation on investments

-


(7,517,092)


-


(7,517,092)

Issue of  share capital

9,746,732


-


-


9,746,732

Net currency losses

-


198,282


-


198,282

Revenue loss for the year

-


-


(1,127,775)


(1,127,775)

Balance at 30 June 2013

48,914,968


(5,209,676)


(8,797,814)


34,907,478

 






Share Premium


Capital

Reserves


Revenue

Reserves


 

Total






2012


2012


2012


2012






£


£


£


£













Balance at 1 July 2011

39,168,236


(1,784,538)


(6,513,232)


30,870,466

Net realised gain on maturities

-


2,471,093


-


2,471,093

Movement in unrealised depreciation on investments

-


1,643,159


-


1,643,159

Realised losses on forward currency contracts

-


(7,403,534)


-


(7,403,534)

Movement in unrealised gains on forward currency contracts

-


6,503,596


-


6,503,596

Net currency losses

-


(459,674)


-


(459,674)

Revenue loss for the year

-


-


(1,156,807)


(1,156,807)

Balance at 30 June 2012

39,168,236


970,102


(7,670,039)


32,468,299

 

18         Related party transactions

Fees earned by the Directors of the Company during the year were £91,042 of which £555  was outstanding at the year end (2012: £76,852 of which £8,063 was outstanding at the year end). Allowable expenses claimed by the Directors in the course of their duties amounted to £4,236 for the year ended 30 June 2013 (2012: £7,877). Fees earned by the Investment Manager, Manager and Administrator are discussed in note 5.

 



 

ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Notes to the Financial Statements (continued)

For the year ended 30 June 2013

 

19         Categories of financial assets and financial liabilities

            The following table analyses the carrying amounts of the financial assets and liabilities by category as defined in IAS 39.


30 June 2013


30 June 2012






£


£

Financial assets




Cash and cash equivalents

1,072,662


558,411

Fair value through profit or loss:




   TLI Policies

36,937,381


41,699,865

   Government Bond

-


113,910




36,937,381


41,813,775





Loans and receivables at amortised cost

995,674


8,942,695












39,005,717


51,314,881

Financial liabilities




Loans and payables at amortised cost

(4,098,239)


(18,846,582)


(4,098,239)


(18,846,582)








34,907,478


32,468,299

 

20         Financial risk management objectives and policies

The main risks to which the Company is exposed are market and longevity risk, currency risk, interest rate risk, liquidity risk and credit risk.

 

Fair value measurements

The Company classifies financial instruments using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under IFRS 7 are as follows:

 

·      Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities;

 

·      Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly (that is, as prices) or indirectly (that is, derived from prices); or

 

·      Level 3 - Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs).

 

The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. For this purpose, the significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a level 3 measurement. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgement, considering factors specific to the asset or liability.

 



 

 

 

 

ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Notes to the Financial Statements (continued)

For the year ended 30 June 2013

 

20         Financial risk management objectives and policies (continued)

 

The determination of what constitutes 'observable' requires significant judgement by the Company. The Company considers observable data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.  

 

The following table presents the Company's financial assets and liabilities by level within the valuation hierarchy as of 30 June 2013.

 


30 June 2013

Percentage of net assets


30 June 2012

Percentage of net assets


£

%


£

%

Level 1 fair value assets

-

0.00


113,910

0.35

Level 3 fair value assets

36,937,381

105.82


41,699,865

128.28


36,937,381

105.82


41,813,775

128.63

 

During the year, the Company sold its holding of UK Treasury Stock, which was the only investment categorised as level 1 of the IFRS fair value hierarchy as at 30 June 2012.

 

The investments categorised as level 3 are the TLI policies held in the Company's portfolio. The valuation of the TLI policies is not based on observable market data, but on the valuation model detailed in note 2(b) used by the Investment Manager to determine the fair value of the policies held, and therefore these investments are categorised as level 3 of the IFRS fair value hierarchy.

 

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 17. The Company does not have any externally imposed capital requirements. At 30 June 2013 net assets attributable to the holders of Shares were £34,907,478 (2012: £32,468,299).

 

As at 30 June 2013, the Company had borrowed circa US$5.9 million from AIB. The existence of these borrowings means that Shareholder returns are "geared" and that these borrowings may 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 78 and 92 years at the point of investment.

 

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 or when there is a cash flow requirement to sell before maturity. The Company is responsible for payment of policy premiums.



ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Notes to the Financial Statements (continued)

For the year ended 30 June 2013

 

20         Financial risk management objectives and policies (continued)

Capital risk management (continued)

 

As at 30 June 2013, the current portfolio comprised 102 TLIs. All TLIs acquired are Whole-of-Life or Universal Life policies.

 

The TLIs acquired are policies issued by a range of US life insurance companies. Each underlying life insurance company had an A.M. Best credit rating of at least "A" at the time of acquisition of the relevant policy, and 94.9% of the portfolio still has, the other 5.1% being  A-. A.M. Best is a US credit rating agency which provides the most comprehensive coverage of the US life company sector. Once the investment programme was concluded, not more than 15 per cent. of the gross assets of the Company were initially invested in life policies issued by any single US Life Insurance Company or Group. This percentage is subject to change dependent on the maturities realised from the Company's TLI portfolio.

 

The Investment Manager uses 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 is 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 proceeds 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 market for TLIs is currently thin and the previous practice of using the results of the  Investment Manager's own successful bids to obtain information on market IRRs has, as a result, been suspended and replaced with the use of a fixed IRR of 12%. After discussion with the Investment Manager, the Board does not feel that the IRRs obtained by the Investment Manager are truly representative of willing buyer/willing seller pricing. The Board is aware that there are a number of examples of policies changing hands in the market at values which imply an assumed IRR of significantly more than 12%, but does not feel that these IRRs are necessarily appropriate for the pricing of investments which are intended to be held to maturity. It is keeping this matter under active review. Meanwhile, the notes below and the further information available in the Chairman's Statement give an indication of the effects on valuation of differing IRR assumptions.

 

At 30 June 2013, should the valuation IRR used increase by 4 per cent with all other variables remaining constant, the decrease in net assets attributable to shareholders for the period would amount to £4,196,169 (2012: decrease of £4,523,933).

 

At 30 June 2013, should the valuation IRR used decrease by 4 per cent with all other variables remaining constant, the increase in net assets attributable to shareholders for the period would amount to £5,446,475 (2012: increase of £5,810,927)



ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Notes to the Financial Statements (continued)

For the year ended 30 June 2013

 

20         Financial risk management objectives and policies (continued)

 

Where the life expectancy (LE) for a specific policy has been obtained since 1 April 2013, this 2013 LE, adjusted for the date on which the LE was obtained, is used for valuation purposes. The average increase in 2013 LE for these policies over the most recent LE obtained prior to April 2013 is then calculated as an adjustment factor. If no 2013 LE is available, the most recent LE obtained will be used adjusted for the date on which it was obtained and uplifted by the calculated adjustment factor. As new LEs are obtained, they will be used for valuation. The cash flow projections are then based on the adjusted LEs using standard actuarial tables.

 

At 30 June 2013, should the remaining life expectancy of the lives insured have increased by 1 year with all other variables remaining constant, the decrease in net assets attributable to shareholders for the period would amount to £9,999,899 (2012: decrease of £10,014,114).

 

At 30 June 2013, should the remaining life expectancy of the lives insured have decreased by 1 year with all other variables remaining constant, the increase in net assets attributable to shareholders for the period would amount to £11,225,420 (2012: increase of £11,058,213).

 

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 had no open forward currency contracts as at 30 June 2013.

 

In the event of a fall in the value of the Company's assets, the Company 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.

 

The Company's net currency exposure was as follows:





30 June 2013


30 June 2012





£


£








Exposure to U.S. Dollar

35,092,855


32,502,601





35,092,855


32,502,601

 

At 30 June 2013, had the 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 £1,671,088 (2012 decrease: £1,547,743). A weakening of 5% would amount to an increase in net assets attributable to shareholders of approximately £1,846,992 (2012 increase: £1,710,663).



ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Notes to the Financial Statements (continued)

For the year ended 30 June 2013

 

20         Financial risk management objectives and policies (continued)

 

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 changes in interest rates is primarily linked to the cost of the variable rate loan facility from AIB.

 

The following table details the Company's exposure to interest rate risk at 30 June 2013 and 30 June 2012 from its interest bearing financial instruments:

 


Financial assets/(liabilities) on which no interest is paid

Fixed rate financial assets

Floating rate financial assets/(liabilities)

Total


2013

2013

2013

2013


£

£

£

£

Sterling

(185,377)

-

-

(185,377)

US Dollars

37,935,164

-

(2,842,309)

35,092,855


37,749,787

-

(2,842,309)

34,907,478

 


Financial assets/(liabilities) on which no interest is paid

Fixed rate financial assets

Floating rate financial assets/(liabilities)

Total


2012

2012

2012

2012


£

£

£

£

Sterling

(167,305)

113,910

19,093

(34,302)

US Dollars

50,586,937

-

(18,084,336)

32,502,601


50,419,632

113,910

(18,065,243)

32,468,299

 

Interest rate risk

The above analysis excludes short term other receivables and other payables as the material amounts are non-interest bearing.

 

No sensitivity analysis has been provided as interest rate risk is not directly considered material to the Company.

 

However, large changes in interest rates are likely to impact on IRRs used in the valuation of TLIs. A sensitivity analysis on IRRs is included on page 45.



ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Notes to the Financial Statements (continued)

For the year ended 30 June 2013

 

20         Financial risk management objectives and policies (continued)

 

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 holds a loan facility for US$15,000,000 (Revolving Credit Facility) of which US$5,938,906 was drawn down at 30 June 2013.

 

On 30 October 2012, the Company signed a renewal of the loan agreement with AIB up to 31 March 2014, which will cover the Company's projected cash flow requirements up to that date.

 

The Board has considered the position should AIB not renew the agreement beyond 31 March 2014. Acknowledging that this might involve the forced sale of policies in an illiquid market, the Board is nevertheless confident that the sales required to cover outstanding borrowings and the funding of the foreign currency losses could be completed.  To the extent that the prices achieved did not match those in the valuation, the net asset value of the Company would be adversely affected, but the business would remain a going concern.

 

The maturity profile of the Company's financial liabilities is set out below. The future premiums payable on the Company's portfolio are not deemed to be financial liabilities for the purposes of this note.  Future loan interest is not material and has also been excluded.

 

As at 30 June 2013









1 month or less

1 to 3 months

3 to 12 months

1 to 5 years

>5 years

Total

Financial liabilities:







Loan facility

-

-

(3,915,675)

-

-

(3,915,675)

Other payables

(182,564)

-

-

-

-

(182,564)











(182,564)

-

(3,915,675)

-

-

(4,098,239)









As at 30 June 2012









1 month or less

1 to 3 months

3 to 12 months

1 to 5 years

>5 years

Total

Financial liabilities:







Fair value of forward currency contracts

-

-

-

-

-

-

Loan facility

-

(18,623,654)

-

-

-

(18,623,654)

Other payables

(222,928)

-

-

-

-

(222,928)











(222,928)

(18,623,654)

-

-

-

(18,846,582)











ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Notes to the Financial Statements (continued)

For the year ended 30 June 2013

 

20         Financial risk management objectives and policies (continued)

 

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.

 

The Company holds cash with Kleinwort Benson (Channel Islands) Limited which has been assigned a rating of Baa2/Prime-2 by Moody's Investors Service.

 

The Company also holds cash with the Sub-Custodian, Wells Fargo, which has been assigned a rating of A+/A-1+ by Standard & Poor's ratings agency.

 

The TLIs in the Company's portfolio, as disclosed on page 32, have been assigned ratings ranging from A- to A++ by A.M. Best ratings agency.

 

Concentration risk

Concentration risk is the risk that the Company's portfolio of TLIs is not sufficiently diversified within a range of US life insurance companies.

 

The Company has invested its assets in a range of TLIs on the lives of US citizens aged, at the time of acquisition, between 78 and 92 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 credit rating of at least "A" at the time of acquisition of the relevant policy; as at 30 June 2013, 94.9% by value of the TLI portfolio was underwritten by companies whose credit rating is "A" or better. 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.

 

 



ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED

 

Notes to the Financial Statements (continued)

For the year ended 30 June 2013

 

21         Events after the reporting period

 

Since the year end, the Company has received policy maturity proceeds of US$7 million, which have been used to repay AIB.

 

22         Contingent liabilities

Following a ruling issued by the US Internal Revenue Service ("IRS") during 2009 the Board received advice from its US tax counsel in respect of withholding tax on the proceeds of  maturities that occurred prior to the Company becoming tax resident in the UK.  Based upon this advice, the Directors continue to be of the view that there would be significant doubt about the merits under US law of any IRS claim to withholding tax on these proceeds, and they would challenge any such claim accordingly. As a result, no provision for any such liability has been made in these financial statements.

 

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 US$4.7 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.

 

 


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