RNS Number:1096R
Barclays Global Inv Endowment Fund
21 October 2003
Barclays Global Investors Endowment Fund Limited
Results for the year ended 31 July 2003
Barclays Global Investors Endowment Fund Limited (BGIEF),
launched in October 1993, is a Jersey-registered closed-
ended investment company, which invests in a range of
traded with-profits endowment policies; it does not invest
in other UK listed investment companies. The policies held
are written by a variety of life offices having a diverse
range of policy terms and maturity dates, thereby seeking
to achieve for shareholders a strategic objective of high
capital growth coupled with low investment risk.
Directors intend to redeem half the Company's remaining
share capital, together with the accumulated profits, in
August 2004 and to wind up the Company on 1 August 2005,
distributing all the remaining assets to shareholders. The
first two redemption payments in August 2001 and 2002 were
paid at 190p per share and the third redemption in August
2003 was at 165p per share.
Financial results for the year ended 31 July 2003 include:
* Fall in Net Asset Value of 14.6% or 29.03p per share,
from 198.27p to 169.24p
* Return per ordinary share of -31.79p
* A fall in the Company share price of 6.6% from 166.5p
to 155.5p. By comparison, the FTSE All Share Index fell by
0.24% during the same period.
Prospective returns after Company expenses to an investor
holding shares to redemption (*see assumptions in Notes to
Editors):
a) 13.2% to an investor buying shares at 155.5p on 30
September 2003
b) 6.4% to an initial shareholder who bought shares at
100p
Commenting on the results, Paul Seymour, Chairman of BGI
Endowment Fund Limited, said:
"TEP values have been hit hard by every bonus announcement.
With no compensating investor demand the Company's net
asset value has consequently fallen sharply over the year
as a whole."
"Despite that, the rates of return from maturing policies
have remained relatively high as the benefits of smoothing
persist, and still look good compared to many alternative
asset classes."
"If comments from within the life offices are true that
operating conditions of the past year are, indeed, the
worst ever seen in the life industry, it may also be the
case that the worst is over."
"I suspect that recovery will be protracted, and that even
when the costs of introducing new regulations have been
absorbed, returns to policyholders are likely to be modest
for some time to come."
-Ends-
For further information please contact:
Barclays Global Investors Endowment Fund Limited
Paul Seymour 01242 547 477
Barclays Global Investors Limited
Glenn Houchell 020 7668 8089
Weber Shandwick Square Mile
Roddy Watt 020 7067 0708
Notes to Editors*
Prospective returns after Company expenses to an investor
holding shares to redemption at current and alternative
policy growth rates
The TEP market's valuation currently assumes that bonus
rates will remain unchanged and that the smoothed asset
share of the policies held will fall in value by an average
of 9.1% per annum to maturity.
------------------------------------------------------------
Policy growth rate Market rate -10% 0%
-9.1%
------------------------------------------------------------
a) To an investor buying
shares on 30.09.03 at
155.5p 13.2% 12.4% 24.2%
b) To an initial shareholder
who bought shares at 100p 6.4% 6.4% 6.8%
------------------------------------------------------------
These figures are for illustrative purposes and not
guaranteed. They serve only to demonstrate the impact of
changing policy growth rates on an investment.
Main assumptions
* No brokerage is charged on share purchases
* All policies are held until maturity
* Policy premiums are paid to maturity
* Base rates continue at 3.5% per annum for the life of
the Company
* Administrative costs increase at 2.5% per annum for
the life of the Company
* No benefits arise from early deaths or other windfall
gains
* The Company is exempt from tax on gains throughout its
life
* One half of the Company's remaining shares will be
redeemed in 2004 and the remainder in 2005
Chairman's Statement
Overview
The general background for TEP investment has remained very
poor throughout the year, though the business outlook and
the rise in equity market values since March have been more
positive. In contrast to previous years, when the Company's
net assets and share price have held up very well relative
to general UK equity prices, this year the accumulation of
problems for the life industry seems to have grown. This
has resulted in draconian cuts to bonuses, with the
inevitable result that TEP values have been hit hard by
every bonus announcement. With no compensating investor
demand the Company's net asset value has consequently
fallen sharply over the year as a whole.
Despite that, the rates of return from maturing policies
have remained relatively high as the benefits of smoothing
persist, and still look good compared to many alternative
asset classes. I am optimistic that stock market recovery
will help life offices to stabilise bonus levels, and
believe that policyholders' funds are under better
management and regulatory control than for some years.
Results for the year
Over the year to 31 July 2003 the Company's net asset value
(NAV) fell by 29.03p per share, or 14.6%, from 198.27p to
169.24p per share. This decline would have been 2.76p per
share greater but for the positive effect of the redemption
of one quarter of the Company's share capital in August
2002 at a price below the NAV. Similarly, the effect of
redeeming one third of the shares in August 2003 was to
raise the NAV by 2.12p from 169.24p to 171.36p per share
after the Company's 31 July 2003 year-end.
The Company's share price fell by 6.6% from 166.5p to
155.5p per share over the twelve month period. Both results
are disappointing, particularly when compared with a
decline during the year of 0.24% in the FTSE All Share
Index and a rise of 1.7% in the 5-15 year Government Bond
Index.
Investment background and share price performance
Despite the poor business background for the year as a
whole, economic data published in recent months has
gradually become more positive, so that stock markets since
March have responded with optimism. It was disappointing to
note that the Company's net asset value and share price
fell for most of the twelve months in response to the deep
cuts in bonuses before stabilising in the spring. The share
price held up well thereafter, despite the further recent
fall in NAV in August in response to a sharp reduction in
bonus rates by Standard Life.
The questions now for with-profits policyholders relate to
how much of the positive economic and market optimism will
translate into policy returns and how much is likely to be
absorbed by costs of rebuilding smoothing reserves, meeting
solvency ratios or new regulatory requirements, life office
restructuring, or supporting low cost products such as
stakeholder pensions. It seems safe to assume that there
will be no early return to bonus increases for most life
offices, though I believe that the life industry is
probably in the process of gaining a more secure long term
footing than before.
Bonus trends
Reductions in both annual and terminal bonuses have been
conspicuous. The sharpness of the downward trend continued
throughout the year and probably surpassed in severity
anything seen since the 1930's - possibly ever. After
whittling away annual bonuses to fairly low levels in the
course of recent years, the major offices announced during
the reporting period an average annual bonus rate at just
half the rate of the previous year.
Maturity payouts, incorporating terminal bonuses, have also
suffered heavily, and yet a number of authoritative reports
have stated in recent months that payouts on with-profits
policies have provided returns that still compare well
against other asset classes. For instance, according to
Money Management Magazine with-profits policies
outperformed funds in the Balanced Managed, and UK All
Companies sectors over 10, 15, 20 and 25 years.
Payouts on some maturing with-profits policies may still be
above their underlying asset shares. To that extent the
maturity payouts on long-term polices issued by those life
offices could continue to fall for a time. However, it is
probably the case that most payouts have now been brought
back into line with asset shares as a result of recent cuts
in terminal bonuses and some recovery in equity markets.
Capital redemption
The Board resolved in April to redeem one third of the
Company's outstanding share capital in accordance with the
intentions set out in the prospectus. This was the third
annual redemption of share capital, and payment was made to
shareholders on 15 August 2003 at the rate of 165p per
share by reference to the net asset value as at 31 May,
which stood at 168.7p per share.
In reaching their decision, Directors took into
consideration the view that the outlook for maturity
payouts by offices still remained uncertain. While wishing
to redeem shares at as high a price as possible, we decided
to pay slightly less than NAV because we suspected that
most offices would probably continue to reduce payouts for
the time being.
Outlook
If comments from within the life offices are true that
operating conditions of the past year are, indeed, the
worst ever seen in the life industry, it may also be the
case that the worst is over. It might be comforting for me
to suggest that we could see an early return to bull
markets based on solid growth in the major economies,
combined with a more confident life industry, operating
securely and profitably within its new regulatory
framework. I suspect, however, that recovery will be
protracted, and that even when the costs of introducing new
regulations have been absorbed, returns to policyholders
are likely to be modest for some time to come. Given the
remaining short life of the Company there is unlikely to be
any significant uplift in the final two redemption payments
to shareholders.
Paul Seymour, Chairman
16 October 2003
Manager's Review
Economic and market background
The US stock market has risen about 25% since its low point
on the eve of the Iraq war and currently stands close to
its highest level for a year. Although the early stages of
the rally were driven more by sentiment, it has probably
been the improving flow of economic news, particularly
consumer spending, which has prolonged market momentum.
A slightly different picture has emerged in Japan where
the economy has performed better than investors dared hope.
A striking increase in capital investment combined with
strong, if erratic, industrial production has given way to
prospects of good export-led recovery. However, it looks
unlikely that recent economic growth rates will be
sustained, and the Japanese equity market recovery may now
slow.
By contrast, European activity remains sluggish despite
some improvement in confidence among economists and
investors. In the first half of the year Germany, Italy,
Switzerland and the Netherlands all succumbed to recession.
Despite that, European equity markets have risen sharply
since their low points in March, performing almost as well
as the US and Japan.
In the UK it is still mainly retail consumption that is
driving the economy. An unexpectedly severe slowdown in
consumer spending growth during the first half of the year,
together with the weak overseas climate, persuaded the Bank
of England to cut interest rates. Since then household
spending has proved surprisingly robust, but with debt
standing at a record 120% of income this may not last. Some
commentators believe that weaker sterling may now help
raise industrial production through exports and overseas
earnings.
Meanwhile, UK investors have received little help from the
gilt market, which is close to its low point for the year.
The substantial 27% rise in the FTSE All Share Index since
its March low point may look too optimistic, perhaps due to
relief following the Iraq conflict and an increased
appetite for risk. However, some market analysts consider
that emerging global recovery combined with the outlook for
UK corporate profits still leave room for UK equity prices
to rise significantly.
The life assurance industry
Most of the issues faced by life offices during the period
were not new, though the relative importance of matters
shifted subtly. Despite some recovery in stock market
values since March, sector news has been dominated for most
of the year by continuing reports of the negative impact of
stock market returns on life funds and the resulting poor
bonuses.
The decline in strength of some life company balance sheets
as a result of weak markets has caused the rating agencies
to reduce some individual credit ratings, including those
for parts of the Aviva group, and Royal & Sun Alliance.
During the year a number of offices responded to the FSA's
invitation to request waivers in respect of solvency ratios
releasing them from obligations to make forced sales of
equities. According to one estimate the current bear market
has caused a #50 billion loss in the value of endowment and
pension policies issued by UK life offices.
However, there is now some evidence that, despite the well-
publicised pressure last year to sell down equities in
favour of bonds in order to meet solvency requirements, the
proportion of equities in most life funds has been reduced
more by the relative movements in equity and bond prices
than by switching one asset class to the other. This should
provide some optimism about the benefits that would accrue
in the event of a significant recovery in the equity
markets.
In some cases poor investment returns have seriously
threatened solvency, though the grave struggles for
survival that some offices faced earlier in the year have
now largely diminished with the recovery in market levels
and measures taken to shore up balance sheets. A number of
offices are reported to be operating at solvency ratios
just above those set by the FSA, while others are no longer
accepting new business. This situation is paralleled in
many overseas jurisdictions where it has also produced
corporate restructuring, asset sales, rights issues, job
cuts, and at least one insolvency in Germany. To put the
problem into perspective, a Nottingham University study
states that in 2002 the average free asset ratio of UK life
offices dropped from 22.9% to 6.6%.
Bonus trends
We have seen repeated cuts in bonuses throughout the year,
with most offices making more than one announcement, and a
number of them indicating that further cuts are likely. By
contrast, the Prudential's August interim report read
fairly positively, with indications that the company does
not intend to cut payouts in the foreseeable future,
believing the decline in investment returns to be over.
Clearly, the investment experience is mixed, emphasising
the importance of selecting policies from the stronger
offices, but it is significant that the average cut in
annual bonus rate declared by the major offices since 2000
is over 52%.
Faced with so much gloom it is important not to lose sight
of the overall policy returns achieved by the Company.
Measuring the weighted average percentage return per annum
for each year in which the Company's policies have matured,
it is apparent that despite the obvious decline the figures
look comfortably ahead of the returns of most other low
risk assets.
Returns from maturing policies
-------------------------------------------------------------
Policies maturing in the period Weighted average
% return p.a.
-------------------------------------------------------------
1 Jan 2000 to 31 Jul 2000 12.4%
1 Aug 2000 to 31 Jul 2001 11.7%
1 Aug 2001 to 31 Jul 2002 10.1%
1 Aug 2002 to 31 Jul 2003 8.1%
All maturities to 31 Jul 2003 10.2%
-------------------------------------------------------------
Regardless of the Prudential's optimism, we believe that
some life offices are still paying out at maturity sums in
excess of asset shares. Indeed, Standard Life, as one of
the best performing offices, has put itself in this
category. It seems possible that some firms in such a
position will feel obliged to continue to reduce payouts in
the near future in order to bring them back into line with
asset shares, and we anticipate a further reduction in the
average annual return on policies held by the Company.
Regulation & corporate governance
Last year the FSA declared its intention to introduce a
number of changes to improve the way in which life offices
are run and the way in which life products are sold. These
changes were proposed in response to public concerns, and
the FSA and Treasury Select Committee actively questioned
many of the long-standing practices in the life industry.
Indeed, many commentators questioned the FSA's own handling
of the Equitable Life affair. Besides, the Sandler Report
on Medium and Long-Term Savings, which was published in
2002, made a number of recommendations for the treatment of
with-profits products by life offices and intermediaries.
Amongst the most important of FSA initiatives since then
has been its proposed new set of rules to determine how
much capital should be held by life offices, and to link
this more directly to how bonus payments are made to
policyholders in practice.
The proposals aim firstly to change the way firms calculate
the financial resources they need to hold in order to
"provide an adequate degree of certainty that they will be
able to make contractual and expected discretionary
payments, such as terminal bonuses." Secondly, they will
require a firm to conduct "stress and scenario testing to
test the overall adequacy of its financial resources".
This means that offices will be required to hold larger
amounts of capital to cover the risks inherent in
smoothing. Measures are also proposed to make reporting
requirements more transparent and frequent.
Importantly, these proposals have also been framed in order
to deal with problems resulting from falling equity markets
last year and earlier this year. At that time life funds
that may have wished to continue holding equities in the
expectation of longer term gains came under short term
pressure to sell equities to meet the reserving
requirements of current FSA solvency ratios. The new
proposals aim to provide policyholders with some protection
from the risk that their terminal bonuses may be adversely
affected by a temporary downturn in the market.
The consultation process for the new proposals is expected
to be complete by Spring 2004, with implementation due
later that year. Also, the FSA will introduce later in 2004
its planned change from the "appointed actuary regime" by
which life and pensions products are internally regulated,
to a regime with an "actuarial function holder" and a "with-
profits actuary". It is envisaged that under the new regime
auditors will have a wider responsibility for scrutinising
policyholder liabilities and that directors will have an
obligation to certify the values of the liabilities.
Consolidation and rationalisation
Without doubt, life offices still face considerable
pressures on their balance sheets and revenue accounts, as
they did at this time a year ago. Most of the underlying
causes are the same as they were then, and most of the
solutions too.
The effects over recent years of having to cope with the
costs of mis-selling pensions and other with-profits
products, of shrinking asset values - in some cases leading
to solvency breaches, of recession and a poor business
environment, as well as the need to deal with new
regulatory measures, have combined to produce intolerable
conditions for much of the industry. The proposed new
regulatory measures, however commendable, will impose a
further burden on life offices.
A year ago it was clear that these conditions were leading
to further reductions in maturity payouts, and dividend
cuts for the proprietary companies. This process has
continued, and many offices have since then also sold
assets and cut staff numbers to improve viability, while a
number of major groups, including Legal & General, Royal
Sun Alliance, and Aviva, have raised new capital or
restructured in order to strengthen their financial
resources.
We are likely to see a continuation of these measures in
the foreseeable future, and in some cases this will mean a
new willingness to merge or be taken over, or to raise new
capital in order to strengthen balance sheets. In short,
management in the industry is likely to employ any strategy
to ensure survival, in many cases without hope of much
business expansion in the near term.
Traded Endowment Policies
Faced with an uncertain background and sharply reduced
investment demand, the TEP market has remained disorderly
and confused during the year. It has been characterised by
widely differing prices between market makers and a
relatively low volume of policies traded compared to levels
seen 18 months ago.
The absence of pricing information in the market place and
the lack of a clear and consistent market structure for
pricing discount rates (PDRs) at any one time has meant
that we have been unable to use confidently the prices in
the secondary market as the basis for our own portfolio
valuations.
The lack of any clear market trend has led us to leave the
PDR basis of our valuation unchanged throughout the year,
though we have been able to rely to some extent on
estimated asset shares backing each policy as a basis of
fundamental value. In any case, we have aimed to be
conservative in our monthly and yearly valuations.
Activity by the Company
During the year the Company received #8.65 million from a
total of 291 maturing policies. The compound rate of return
on these policies averaged 8.1% p.a., which may be compared
in the table above with the higher rates of return received
from maturing policies in previous years.
Windfall gains this year have been minimal. There were no
gains received from demutualisations or other corporate
activity, and only a single small claim was received as a
result of a death.
In order to finance its running costs and pay policy
premiums during the year the Company borrowed a total of
#6.60 million plus rolled up interest of #142,000, bringing
the total amount drawn on the borrowing facility to #6.74
million. Of this amount, #6.70 million was repaid at
intervals throughout the period from the proceeds of
policies maturing with the aim of minimising borrowing
costs. Since the year end #5.20 million was redrawn to part-
finance the redemption of share capital in August. Amounts
have been borrowed at rates between 3.86% and 4.46% p.a.
during the year.
Outlook
Although some stock markets seem to have run ahead of
earlier expectations, most analysts agree that the
improving outlook in most developed economies will help
lift equities further over the medium term. Even
Continental European markets seem able to run further,
despite depressed economies, because many of their large
multinational companies are likely to benefit from recovery
elsewhere in the world.
Although equities now represent less than 50% of many life
fund portfolios, the impact of any sustained market
recovery on with-profits policies would be extensive in the
long run. Life office balance sheets have already reflated
to some extent with the recovery in stock market levels.
Since net surplus assets now stand in excess of
policyholder liabilities solvency is probably assured for
the great majority of offices. The overall welfare of the
industry depends substantially on the performance of the
markets and the asset allocation strategies of individual
businesses, together with the geographical mix of their
business activities.
Besides a direct impact on net assets, continuing good
market performance would be likely to have a number of
other beneficial effects for policyholders. Importantly,
sales of with-profits products should increase with the
growth of consumer confidence, and the costs of meeting new
regulatory measures will be more easily achieved to the
advantage of policyholders.
Although economies and stock markets may have turned, life
funds are not yet totally out of trouble. In order for the
benefits of economic and market recovery to be realised in
the form of increased bonuses it will be necessary for
smoothing accounts to go through a period of adjustment in
which the over-payments of recent years are off-set by a
period of under-payment. This process could take several
years to complete, but we anticipate some restoration of
bonus levels as soon as conditions allow.
Barclays Global Investors
16 October 2003
Statement of Total Return
(incorporating the Revenue Account) for the year ended 31
July 2003
2003 2002
Note Revenue Capital Total Revenue Capital Total
# # # # # #
----------------------------------------------------------------------------------------------
Realised
gains on
investments 1 - 3,631,330 3,631,330 - 5,151,925 5,151,925
Movement
in
unrealised
gains on
investments 6 - (6,877,090) (6,877,090) - (5,840,873) (5,840,873)
Dividend
and
interest
income 2 16,435 - 16,435 31,061 - 31,061
Administrative
expenses 3 (444,135) - (444,135) (519,355) - (519,355)
----------------------------------------------------------------------------------------------
Net return
before
finance
costs (427,700) (3,245,760) (3,673,460) (488,294) (688,948) (1,177,242)
Interest
payable 10 (142,009) - (142,009) (187,590) - (187,590)
----------------------------------------------------------------------------------------------
Return on
ordinary
activities
for the
financial
year (569,709) (3,245,760) (3,815,469) (675,884) (688,948) (1,364,832)
----------------------------------------------------------------------------------------------
Transfer
from 15,
reserves 16 (569,709) (3,245,760) (3,815,469) (675,884) (688,948) (1,364,832)
----------------------------------------------------------------------------------------------
Return per
Ordinary
Share 5 (31.79p) (8.53p)
----------------------------------------------------------------------------------------------
Change in Net Asset Value per Share
2003
-------------------------------------------------------------------
Net asset value per share as at 31 July 2002 198.27p
Revenue return per Ordinary Share (4.74p)
(comprising Dividend and interest income less
Administrative expenses and Interest payable)
Capital return per Ordinary Share (27.05p)
(comprising Realised gains on investments and
Movement in unrealised gains on investments)
-------------------------------------------------------------------
Return per Ordinary Share (31.79p)
Redemption of Ordinary Shares on 1 August 2002 2.76p
-------------------------------------------------------------------
Change in net asset value per Ordinary Share (29.03p)
-------------------------------------------------------------------
Net asset value per share as at 31 July 2003 169.24p
-------------------------------------------------------------------
Balance Sheet as at 31 July 2003
2003 2002
Note # # # #
--------------------------------------------------------------------------------------
Fixed Assets
Investments 6 9,259,281 21,626,686
Current Assets
Investments 6 10,934,302 9,853,517
Debtors 8 117,517 244,222
Cash at Bank 244,758 195,095
--------------------------------------------------------------------------------------
11,296,577 10,292,834
Creditors
Amounts falling due
within one year 9 (186,964) (177,151)
--------------------------------------------------------------------------------------
Net Current Assets 11,109,613 10,115,683
--------------------------------------------------------------------------------------
Total Assets less
Current Liabilities 20,368,894 31,742,369
Creditors: Amounts
falling due after more
than one year 10 (60,518) (18,579)
--------------------------------------------------------------------------------------
Net Assets 20,308,376 31,723,790
--------------------------------------------------------------------------------------
Capital and Reserves
Called up Share Capital 11 120,003 160,003
Share Premium 12 11,880,088 15,840,059
Capital Redemption
Reserve 13 79,999 39,999
Capital Reserve 14 16,720,512 23,606,246
Revenue Reserve 15 (8,492,226) (7,922,517)
--------------------------------------------------------------------------------------
Shareholders' Funds 16 20,308,376 31,723,790
--------------------------------------------------------------------------------------
Approved by the Board on 16 October 2003 and signed on its
behalf by:
Paul A. C. Seymour M. E. Lentz
Cash Flow Statement for the year ended 31 July 2003
2003 2002
Note # # # #
--------------------------------------------------------------------------------------
Net cash outflow from
operating activities
(Note 1) (279,860) (494,963)
Capital expenditure and
financial investment
Payment of premiums (467,268) (672,784)
Cash received from
policies ceasing on
maturity 8,650,486 10,282,054
Cash received from
policies ceasing on
death 16,375 137,505
Receipts from windfall
gains - 432,855
--------------------------------------------------------------------------------------
Net cash inflow from
capital expenditure and
financial investment 8,199,593 10,179,630
Net cash inflow before
management of liquid
resources and financing 7,919,733 9,684,667
Management of liquid
resources
Cash invested in
liquidity fund units (148,000) (678,900)
Financing
Decrease in loan (100,070) (1,330,035)
Net cash outflow from
share redemptions (7,622,000) (7,525,384)
--------------------------------------------------------------------------------------
Net increase in cash 49,663 150,348
--------------------------------------------------------------------------------------
Reconciliation of net 2003 2002
cash flow to
movement in net debt # #
--------------------------------------------------------------------------------------
Increase in cash in the
year 49,663 150,348
Movement in liquidity
funds 148,000 678,900
Movement in loan
facility 100,070 1,330,000
--------------------------------------------------------------------------------------
Movements in net debt
resulting from cash
flows 297,733 2,159,248
Increase in liquidity
funds due to reinvested
dividend income 10,733 16,775
Increase in borrowings
due to rolled up
interest (142,009) (187,555)
Net cash/(debt) at 1
August 2002 1,020,322 (968,146)
--------------------------------------------------------------------------------------
Net cash at 31 July
2003 1,186,779 1,020,322
--------------------------------------------------------------------------------------
Notes to the Cash Flow Statement
1. Reconciliation of net return before finance costs to
net cash outflow from operating activities
2003 2002
# #
---------------------------------------------------------
Net return before finance
costs (427,700) (488,294)
Reinvested dividend income on
liquidity funds (10,733) (16,775)
(Increase)/decrease in revenue
account debtors (13,480) 37,048
Increase/(decrease) in revenue
account creditors 172,053 (26,942)
---------------------------------------------------------
Net cash outflow from
operating activities (279,860) (494,963)
---------------------------------------------------------
2. Analysis of net debt
As at 31 July Cash flows Non-cash flow As at 31 July
2002 movement 2003
# # # #
-----------------------------------------------------------------------------
Cash at bank 195,095 49,663 - 244,758
Cash
invested in
liquidity
fund units 843,806 148,000 10,733 1,002,539
Borrowings (18,579) 100,070 (142,009) (60,518)
-----------------------------------------------------------------------------
1,020,322 297,733 (131,276) 1,186,779
-----------------------------------------------------------------------------
Notes to the Financial Statements for the year ended 31 July 2003
Principal Accounting Policies
The financial statements have been prepared under the
historical cost convention, as modified for the revaluation
of investments, and in accordance with United Kingdom
generally accepted accounting principles. The Directors
consider that the accounting policies set out below are
suitable, have been consistently applied, and are supported
by reasonable judgements and estimates.
Statement of Recommended Practice
The financial statements have been prepared in accordance
with the Statement of Recommended Practice issued by the
Association of Investment Trust Companies in December 1995.
Revenue and expenses
Deposit interest and expenses are accounted for on an
accruals basis.
Investments
Investments are included in the Balance Sheet at valuation
and any differences arising between value and cost are
reflected in an unrealised capital reserve. Profits or
losses arising on maturity or death are reflected in a
realised capital reserve.
Endowment policies have been valued by the Consulting
Actuary and advisor to the fund (N. H. Taylor FIA, ASA) as
at 31 July 2003. The method used calculates a formula
maturity value for each policy by reference to current
reversionary bonus and terminal bonus rates. Using standard
actuarial formulae, a pricing discount rate, fixed by the
Consulting Actuary, is then applied to the formula maturity
value and future premium liabilities to give the net
present value of each policy. The base pricing discount
rate used by the Consulting Actuary in his valuation as at
31 July 2003 was 9.25%. (The base pricing discount rates
used by the Consulting Actuary in his valuation as at 31
July 2002 were 8.75% for policies maturing up to 31 July
2003 and 9.25% for policies maturing thereafter).
Adjustments are then made to the base pricing discount
rates by the Consulting Actuary to reflect the particular
circumstances of some life offices. No allowance is made
for mortality. Premiums are accounted for on a paid basis,
and are treated as an increase in the cost of investment.
The valuation of listed investments has been based on mid-
market prices at the close of business on the last business
day of the year.
Recognition of windfall gains
Windfall gains from demutualisations and other corporate
activity are accrued once they receive Court or other
relevant approval. Where there is uncertainty as to the
amount of any windfall the Directors' accrue on a
conservative basis.
1. Realised Gains on Investments
2003 2002
# #
-------------------------------------------------------
Gains on policies ceasing on
death of the life assured 10,411 77,281
Gains on maturity of policies 3,620,919 4,829,303
Windfall gains* - 245,341
-------------------------------------------------------
3,631,330 5,151,925
-------------------------------------------------------
* Windfall gains in 2002 comprised amounts received
from the demutualisations of Scottish Provident,
Scottish Life and Friends Provident that were in
excess of the amounts accrued and recognised in the
previous year.
2. Dividend and Interest Income
2003 2002
# #
------------------------------------------------------
Interest on bank deposits 5,528 14,286
Dividend income on liquidity
fund units 10,907 16,775
------------------------------------------------------
16,435 31,061
------------------------------------------------------
3. Administrative Expenses
2003 2002
# #
------------------------------------------------------
Investment management fee* 104,863 158,107
Administrative and secretarial
fees 73,764 59,088
Other policy administration
services 104,863 158,107
Banks'commitment fees and
other charges 15,632 21,183
Directors' emoluments 42,500 42,500
Auditors' remuneration 11,500 9,180
Other expenses** 91,013 71,190
------------------------------------------------------
444,135 519,355
------------------------------------------------------
* The terms of the investment management agreement are
set out on page 17.
** Includes an increased accrual for liquidation
expenses.
Directors' emoluments disclosed above include amounts paid to:
2003 2002
# #
-------------------------------------------------------------------
Chairman and highest paid Director 10,000 10,000
-------------------------------------------------------------------
4. Taxation
The Company qualifies as a Jersey Exempt Company and is
not subject to taxation, other than a Jersey Exempt
Company fee of #600 per annum (2002: #600).
5. Return per Ordinary Share
Return per Ordinary Share has been calculated by
dividing the total investment return for the year of
(#3,815,469) (2002: loss of #1,364,832) by the number
of Ordinary Shares in issue of 12,000,089 (2002:
16,000,060), being the number of shares in issue
immediately following the redemption of shares on 1
August 2002 and which was unchanged for the remainder
of the period.
6(a).Fixed Asset Investments
Endowment Policies 2003 2002
# #
-----------------------------------------------------------
Cost
Balance as at 1 August 2002 11,656,645 15,871,052
Cost of policies ceasing at
death (5,306) (43,999)
Cost of policies ceasing on
maturity (3,831,745) (4,170,408)
-----------------------------------------------------------
Balance as at 31 July 2003 7,819,594 11,656,645
-----------------------------------------------------------
Premiums
Balance as at 1 August 2002 4,219,221 5,026,292
Premiums paid in year 467,268 672,784
Transferred on death (658) (16,225)
Transferred on maturity (1,197,822) (1,463,630)
-----------------------------------------------------------
Balance as at 31 July 2003 3,488,009 4,219,221
-----------------------------------------------------------
Unrealised appreciation
Balance as at 1 August 2002 14,760,531 20,601,404
Decrease in year (6,877,090) (5,840,873)
-----------------------------------------------------------
Balance as at 31 July 2003 7,883,441 14,760,531
-----------------------------------------------------------
Valuation as at 31 July 2003 19,191,044 30,636,397
-----------------------------------------------------------
6(b).Current Asset Investments
Liquidity Funds 2003 2002
# #
-----------------------------------------------------------
Cost
Balance as at 1 August 2002 843,806 148,131
Cost of funds purchased during
the year 1,800,000 6,916,700
Dividends reinvested in the year 10,733 16,775
Cost of funds redeemed during
year (1,652,000) (6,237,800)
-----------------------------------------------------------
Balance as at 31 July 2003 1,002,539 843,806
-----------------------------------------------------------
Liquidity funds consist of investments in sterling
currency funds, which can be redeemed at 24 hours
notice. The purpose of these investments is to aim to
achieve the best possible return from shareholders'
funds pending part repayment of the loan, as disclosed
in Note 10. During the year the Company invested in the
BGI Fixed Income Selection Sterling Liquidity First
Fund.
6(c).Analysis of Fixed and Current Asset Investments
2003 2002
# #
-----------------------------------------------------------
Fixed Asset Investments
Endowment policies maturing in
more than one year 9,259,281 21,626,686
-----------------------------------------------------------
Current Asset Investments
Endowment policies maturing in
less than one year 9,931,763 9,009,711
BGI Fixed Income Selection
Sterling First Liquidity Fund 1,002,539 843,806
-----------------------------------------------------------
Total Current Asset Investments 10,934,302 9,853,517
-----------------------------------------------------------
7. Contingent Liabilities and Commitments
At 31 July 2003 there were no contingent liabilities.
On 25 June 2003 the Company gave notice to shareholders
of the redemption of one third of the shares in issue.
On 6 August 2003, the Company redeemed 3,999,985
Ordinary Shares of 1p each at a cost of #6,599,975.
Future premiums payable in respect of endowment
policies held at 31 July 2003 were as follows:
2003 2002
# #
-----------------------------------------------------------
Due within one year 312,359 529,070
Due after more than one year 92,465 595,882
-----------------------------------------------------------
404,824 1,124,952
-----------------------------------------------------------
8. Debtors
2003 2002
# #
-----------------------------------------------------------
Policy proceeds receivable 92,597 232,783
Other debtors 24,919 11,439
-----------------------------------------------------------
117,516 244,222
-----------------------------------------------------------
9. Creditors
2003 2002
# #
-----------------------------------------------------------
Amounts falling due within one
year:
Policy proceeds received in
advance - 40,084
Other creditors 186,964 137,067
-----------------------------------------------------------
186,964 177,151
-----------------------------------------------------------
10. Bank Facility
Under an agreement dated 23 September 1993 (as amended
8 November 1995, and further amended 29 October 1996)
between the Company and Barclays Bank PLC, Barclays
Bank PLC agreed to make available a revolving credit
facility, amounting initially to #12 million, for the
purpose of financing, inter alia, the payment of policy
premiums and the interest, fees and ongoing management
and administrative expenses payable by the Company.
Under its terms the Company pays interest at 0.45 per
cent over the London Inter-Bank Offered Rate on the
drawn portion of the facility. The Company also pays a
commitment fee of 0.225 per cent per annum on the non
utilised portion of the facility. The Company's
obligations to Barclays Bank PLC under the facility are
secured on the basis of a fixed and floating charge
over the Company's undertakings and assets and is
repayable over the years 2001-2005 although fixed dates
of repayment within this period are not provided for.
Interest payable for the year in respect of this
facility was #142,009 (2002: #187,590). These charges
have been funded from principal amounts drawn down.
The movement of the borrowings under the facility were
as follows:
2003 2002
# #
-----------------------------------------------------------
Drawn portion of the facility
as at 1 August 2002 18,579 1,161,024
Principal amounts drawn down 6,600,000 7,150,000
Interest payable in the year 142,009 187,590
Principal and interest amounts
repaid in the year (6,700,070)(8,480,035)
-----------------------------------------------------------
Drawn portion of the facility
as at 31 July 2003 60,518 18,579
-----------------------------------------------------------
11. Called up Share Capital
2003 2002
# #
-----------------------------------------------------------
Authorised
Equity:20,000,000 Ordinary
Shares of 1p each 200,000 200,000
Non-equity:160,000 Preference
Shares of #1 each 160,000 160,000
-----------------------------------------------------------
360,000 360,000
-----------------------------------------------------------
Allotted and fully paid
12,000,089 (2002: 16,000,060)
Ordinary Shares of 1p each 120,001 160,001
2 Preference Shares of #1 each 2 2
-----------------------------------------------------------
120,003 160,003
-----------------------------------------------------------
The preference shares do not confer any rights to
dividends. They do not have voting rights except where
the rights of the preference shares are to be varied
but have a preferential right to return of capital on a
winding up.
On 1 August 2002, the Company redeemed 3,999,971
ordinary shares at 190p per share. The redemption
proceeds repaid share capital and premium of #3,999,971
and distributed accumulated capital reserves of
#3,599,974 to shareholders. Following this redemption,
the number of shares in issue was 12,000,089.
12. Share Premium
2003 2002
# #
-----------------------------------------------------------
Balance as at 1 August 2002 15,840,059 19,800,000
Redemption of shares (3,959,971) (3,959,941)
-----------------------------------------------------------
Balance as at 31 July 2003 11,880,088 15,840,059
-----------------------------------------------------------
13. Capital Redemption Reserve
2003 2002
# #
-----------------------------------------------------------
Balance as at 1 August 2002 39,999 -
Transfer from Capital Reserve
on redemption of shares 40,000 39,999
-----------------------------------------------------------
Balance as at 31 July 2003 79,999 39,999
-----------------------------------------------------------
14. Capital Reserve
Realised Unrealised Total
# # #
-------------------------------------------------------------------
Balance as at 1 August 2002 8,845,715 14,760,531 23,606,246
Redemption of shares (3,599,974) - (3,599,974)
Transfer to Capital
Redemption Reserve on
redemption of shares (40,000) - (40,000)
Realised gains on
investments for the year 3,631,330 - 3,631,330
Unrealised depreciation on
investments for the year - (6,877,090) (6,877,090)
-------------------------------------------------------------------
Capital reserve at 31 July
2003 8,837,071 7,883,441 16,720,512
-------------------------------------------------------------------
15.Revenue Reserve
2003 2002
# #
-------------------------------------------------------------------
Balance as at 1 August 2002 (7,922,517) (7,246,633)
Deficit for the year (569,709) (675,884)
-------------------------------------------------------------------
Balance as at 31 July 2003 (8,492,226) (7,922,517)
-------------------------------------------------------------------
The Fund is not intended to generate revenue returns,
and all return is in the form of capital.
16. Reconciliation of Movements in Shareholders' Funds
2003 2002
# #
-------------------------------------------------------------------
Deficit for the year (569,709) (675,884)
Recognised capital losses for
the year (3,245,760) (688,948)
-------------------------------------------------------------------
(3,815,469) (1,364,832)
Capital redemption on 1 August
2002 (7,599,945) (7,599,886)
Opening Shareholders' Funds 31,723,790 40,688,508
-------------------------------------------------------------------
Closing Shareholders' Funds 20,308,376 31,723,790
-------------------------------------------------------------------
Shareholders' funds are attributable to each class of
share as follows:
2003 2002
# #
-------------------------------------------------------------------
Equity shares 20,308,374 31,723,788
Non-equity shares 2 2
-------------------------------------------------------------------
20,308,376 31,723,790
-------------------------------------------------------------------
17.Financial Instruments and Risk
The Company's investment policy, as stated in the
prospectus, is to seek a high level of capital growth
combined with low risk by investing in a range of
traded endowment policies. The policies are written by
a number of life offices with a diversified range of
policy terms and dates. It is the intention of the
directors to redeem one fifth of the Company's original
share capital in each of the years 2001 to 2005.
To achieve this policy the Company must hold or enter
into financial instruments, which may include:
* Traded endowment policies, fixed income deposits and
shares in BGI Fixed Income Selection Sterling First
Liquidity Fund;
* Cash, liquid resources and short-term debtors and
creditors that arise directly from its activities; and
* Revolving credit facilities to enable the payment of
policy premiums and other company expenses.
The holding of financial instruments pursuant to the
above investment policy involves certain inherent
risks. Events may occur that would result in a
reduction in the Company's net assets.
The main risks arising from the Company's financial
instruments are listed below together with the policies
adopted by the Board to manage these risks. The
policies adopted by the Board have remained
substantially unchanged since the launch of the
Company.
Market Price Risk
Market risk arises mainly from uncertainty surrounding
reversionary and terminal bonus rates declared by life
offices, affecting policies held. Market values and
ultimately returns to shareholders are adversely
affected to the extent that life offices reduce bonus
rates or that interest rates are increased, which may
affect the pricing discount rates on which TEPs are
valued.
It is the policy of the Company to minimise the risk of
short-term market price fluctuations by holding
policies to maturity rather than actively trading the
portfolio. However, in the long-term shareholder
returns will be dependent on bonus rate declarations.
The Company also minimises market price risk by
requiring that the Manager meets regularly with the
Consulting Actuary to consider the asset allocation of
the portfolio in order to manage the risk associated
with particular life offices whilst continuing to
follow stated investment policies.
Foreign Currency Risk
It is the policy of the Company only to invest in
sterling denominated with-profit endowment policies,
and as a result it faces no direct foreign currency
risk.
Management of Liquid Resources
It is the policy of the Company to maintain only
minimal holdings of cash. Cash received from maturing
policies and arising from deaths and demutualisations
are invested in BGI Fixed Income Selection Sterling
First Liquidity Fund and used to reduce borrowings.
Interest Rate Risk on Borrowing facility
As set out in the prospectus, it is the policy of the
Company to fund premiums payable on traded policies and
operating expenses of the Company with bank borrowings.
It is currently the Company's policy to borrow at short-
term interest rates. Under the loan facility agreement
the Company has the option to borrow at periods of up
to 12 months. Longer periods may be arranged by special
negotiation.
The Company, as a result of its use of bank borrowings,
is exposed to the risk of movements in interest rates.
Rises in interest rates would increase the cost of the
Company's borrowings and reduce returns to
shareholders. The applicable terms and rates associated
with bank borrowings as at the year-end are set out in
Note 10.
Assignment Risk
Investing in traded endowment policies exposes the
Company to a higher than average risk that good title
is not passed on acquisition of a new policy.
It is the policy of the Company to minimise the risk by
buying and selling endowment policies only through an
approved market maker who is responsible for ensuring
that each assignment is legal and good title is passed
to the Company.
18.Post balance sheet event
During the year, the Board resolved to redeem one third
of the Company's Ordinary Shares, immediately
subsequent to the year-end, in accordance with the
Company's prospectus. Payment was duly made to the
shareholders for the 3,999,985 shares redeemed at a
rate of #1.65 per share on 15 August 2003. The number
of Ordinary Shares in issue following this redemption
is 8,000,104. This redemption was substantially funded
by a draw down of the Company's loan facility, which
had previously been repaid using the proceeds from
maturing policies received in the year.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR FESFUSSDSEDS