An Investment To Die For..

Wednesday, Nov 21 2012 by

Cash/bonds just bore me… Event-driven investing is a far better alternative. It’s low risk, low correlation, and it offers attractive annualized returns. But the safest short term event-driven investing is time & research intensive, and low absolute returns present a risk (‘picking up pennies…‘). Longer term event-driven/catalyst investing usually offers far better absolute returns, but at a price: i) increased market/economic correlation, and ii) no assurance your returns will be positive. I’ve written about thishere.

My solution: All I want is a low risk & uncorrelated investment which guarantees significant increases in intrinsic value over time. That’s like asking for the sun, moon & stars…but here’s a snap-shot of the ultimate in event-driven investments:

Recognize that? It’s an example of this gentleman’s calling card. Yeah, the Grim Reaper, our constant companion, as he patiently waits for our own ultimate event. The chart above was the evolving Life Expectancy (LE) curve in the US. Clearly, in the past century, we’ve learned to (on average) delay the Reaper’s gratification. But with little success in extending the bounds of our mortality, and zero success in shifting that 0% survival rate. Death really is even surer than taxes…

But this very predictability brought forth a life insuranceindustry centuries ago. For a small/regular premium, people could assure themselves of an increasingly valuable financial asset which transforms into a large lump-sum payment upon death. Buying these life insurance policies from the original owner (and insured) is known as a life settlement – it offers an investment that steadily increases in value, is uncorrelated with the market/economy, and has a relatively predictable (& ultimately certain) value realization event.

But…find a perfect investment, and inevitably the promoters & brokers ruin it for everybody. And life settlements proved a real cess-pit: LEs were under-estimated, miscalculated, or simply falsified. Investors/funds over-leveraged themselves, and/or lacked the resources to maintain premium payments (in which case the policies would lapse!). Viatical settlements were all the rage, only for the insured to live another decade or two as new…

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3 Comments on this Article show/hide all

dangersimpson 21st Nov '12 1 of 3

Good write up, thanks. Couple of quick Q's:

1. What's their policy for returning funds to shareholders? Do they make regular payments or will they simply pay out everything when the last person dies? Will any payments be dividends or capital? Any US witholding tax?

2. Your returns over the medium term require the discount to NAV to close - what has the discount been over time? Is there a reason why the discount is unusually large at the moment?

3. Any counterparty risk on the policies? Are they with one insurer or many? How robust are the insurers' finances to pay out on these policies?



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argoal 22nd Nov '12 2 of 3

Danger I think I can answer your questions.

There are a couple of statements in the annual report that allude to how returns will be managed.

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.

So a wind up around 2016 is planned which fits in with the calculations of when the increase in Nav begins to drop off.

In the meantime.....

It is intended that the proceeds of TLIs which mature are used, after the deduction of expenses:
• first, to reduce and then eliminate bank borrowings under the Company’s credit facility; and
• secondly, to return capital to shareholders as determined by the Board.

If I have understood the fantastic analysis above then the bank borrowings have been effectively eliminated by  the placing so it looks likely a return of capital via a dividend will be starting.

 Thanks for the work on this Wexboy. I love the idea of it being uncorrelated to external events.

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Wexboy 6th Dec '12 3 of 3

Thks, argoal!

dangersimpson, think pretty all your questions are answered above, and in the investment objective kindly provided by argoal.

Discount has been larger - as I said, TLI v nearly expired itself in the past few years as it suffered a painful squeeze between reducing valuations, increasing debt & premium payments. As a result, it has become a massively neglected share ever since. I believe that's now reversing (as you can see!), and a combination of zero debt, steady/increasing policy maturities & NAV increases, and the commencement of shareholder distributions will prove v attractive to a widening circle of investors. A premium wouldn't be extraordinary here either, at some point.

As long as share price trades at a discount to intrinsic value, a (sustained) share buyback programme makes most sense (buybacks enhance intrinsic value for shareholders, dividends don't) which would also v supportive to the share price & a reducing discount.


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About Wexboy


My personal investing career began with an emerging markets obsession. Investing in individual emerging market stocks was a much taller order then than today, so I gravitated towards investment fund shares and warrants. Little did I know that (despite the volatility involved) this would turn out to be a very fortunate approach – it pretty much saved me from the consequences of poor/misguided stock analysis, chasing stock tips and investing in garbage stocks all the way down to zero.... Only when I learned of value investing did I finally discover a quantitative approach, plus a set of tools, that appealed to me and equipped me better for investing. And I guess it appealed to my mathematical background and perhaps my natural scepticism. It also tempered my lust to dive into investment trends – in fact, I’ve come to realize that any decent secular trend will take many many years to play out and there will be cycles of booms and busts in any related stocks to exploit, so hold your horses, stick to value investing and your chance will come…!  more »

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