EEA Life Settlements Fund PCC Limited. Annual Report and Audited Consolidated Financial Statements for the year ended 31 December 2014

Transcription

1 Annual Report and Audited Consolidated Financial Statements for the year ended 31 December 2014

2 Directory Directors M A Colton (Chairman) S Burnett (appointed 8 April 2014) C Daly D Jeffreys (appointed 8 April 2014) A J Simpson S A Shaw The address for each of the directors is that of the registered office Registered Office Regency Court Glategny Esplanade St Peter Port Guernsey Manager EEA Fund Management (Guernsey) Limited PO Box 282 Regency Court Glategny Esplanade St Peter Port Guernsey GY1 3RH Administrator, Secretary and Registrar International Administration Group (Guernsey) Limited PO Box 282 Regency Court Glategny Esplanade St Peter Port Guernsey GY1 3RH Legal Advisers to the Fund (as to Guernsey law) Ogier Redwood House St Julian s Avenue St Peter Port Guernsey GY1 1WA Custodian BNP Paribas Securities Services SCA, Guernsey Branch BNP Paribas House St Julian s Avenue St Peter Port Guernsey GY1 1WA Sub Custodian RBS Citizens N.A. One Citizens Plaza RC0310 Providence R USA Auditors Grant Thornton Limited Lefebvre House Lefebvre Street St Peter Port Guernsey GY1 3TF Investment Adviser ViaSource Funding Group LLC 106 Allen Road Bernards Township New Jersey USA Page 1

3 Investment adviser s report ViaSource Funding Group, LLC ( ViaSource ) is the investment adviser to EEA Life Settlements Fund PCC Limited (the Fund ), selecting and managing a pool of policies that meet the purchasing criteria outlined in the prospectus. The purchasing criteria were designed to provide a pool of policies that are diversified among insurers, insureds and illnesses, from creditworthy insurance companies and are accurately underwritten for life expectancy. Prior to purchase all policies are certified by Mills, Potoczak and Company, who act as servicing agent, as to meeting the purchasing criteria. The cash reserves and policies purchased are held in the Trust Department of RBS Citizens N.A. and therefore are not part of the assets of the bank. In addition, ViaSource s team of medical professionals tracks the progress of the insureds. The Fund has purchased a total of 926 policies from 108 different insurers and 729 separate insureds with a total net death benefit of $1.87 billion. The weighted average current insureds were 86 years old at year end. Revised Life Expectancies As of June the Board of Directors revised the life expectancy of remaining policies (note 1) which extended the weighted average life expectancy remaining by 28 months. 504 of the policies with a combined Death Benefit of US$732.8 million have matured since inception. The policies that matured did so at 77% (1) of their projected life expectancy and represented 39% of the total Net Death Benefit of policies purchased and 54% of the number of policies purchased. The 413 policies outstanding as of 31 December 2014 had a total net death benefit of US$1.12 billion and an average Face Value of US$2.72 million. The majority 68% of the active fund are comprised of policies with death benefits of $5.0 million or greater. These policies had a weighted average remaining months to LE of 41.0 months. Policies are issued by 79 insurance companies with a weighted average rating of A+. Revised Valuation Method As of December 31, 2014 the Fund appointed an independent third party to determine the value of the policies outstanding. The third party utilizes an actuarial present value model which adjusts the life expectancies obtained from the independent life expectancy providers and applies a discount rates based upon their experience with the independent life expectancy provider. Their adjusted weighted average remaining Life Expectancy is 48.6 months. Current Market Overview The insurance market in the United States is estimated by several research groups to be in excess of US$21 trillion with over US$1 trillion of policies lapsing without value to the policyholders annually. The policies purchased by the life settlement industry are estimated to be approximately US$10 billion annually. The market for selling policies to third parties is relatively new in the United States with most individuals not aware of the ability to sell their policy. Therefore, the potential growth for the market is tremendous as more individuals become aware of the product. Currently, financial institutions including security firms, banks and hedge funds are purchasing policies in the market with life expectancies greater than 4 years and varying other criteria including minimum age of insureds. Most firms utilise actuarial models where policies purchased are evaluated on a pool basis with actuarial and probability assumptions allied to the policies to determine the projected return and cash flows from the pools. ViaSource Funding Group LLC June 2015 The percentage of life expectancy represents prior to July 2013 refers to the expected maturity date based on the life expectancy estimates obtained from independent life expectancy providers at the time of purchase. From July 2013 onwards, the expected maturity date is based on the life expectancy estimates obtained from a life expectancy provider in Page 2

4 Directors Report The Directors present their annual report and the audited consolidated financial statements of EEA Life Settlements Fund PCC Limited ( Company or Fund ) and its subsidiaries (collectively the Group ) for the year ended 31 December Business activities The Company was registered in Guernsey on 20 June 2005 under The Companies (Guernsey) Law, The Group s investment objective is to acquire and trade the property interest in a diversified portfolio of outstanding life insurance policies issued primarily in the United States. Authorisation The Company has been authorised by the Guernsey Financial Services Commission ( the Commission ) under The Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended, as a Class B Scheme as defined in The Collective Investment Schemes (Class B) Rules The Commission has issued The Authorised Collective Investment Schemes (Class B) Rules 2013 which came into operation on 2 January 2014 and revised the old rules. Each of the Company s active Cells was listed on the Channel Islands Securities Exchange. The listing was suspended on 30 November 2011 and cancelled on 30 June At 31 December 2014, there were twenty eight cells in operation: USD Fund Class X Cell (the Dollar X Cont Cell ), USD Fund Class X Run-Off Cell (the Dollar X Run-Off Cell ), USD Fund Dist Cell (the Dollar Dist Cont Cell ), USD Fund Dist Run-Off Cell (the Dollar Dist Run-Off Cell ), USD Fund Acc Cell (the Dollar Acc Cont Cell ), USD Fund Acc Run-Off Cell (the Dollar Acc Run-Off Cell ), USD Fund Class I Run-Off Cell (the Dollar I Run-Off Cell ), Euro Fund Class X Cell (the Euro X Cont Cell ), Euro Fund Class X Run-Off Cell (the Euro X Run-Off Cell ), Euro Fund Dist Cell (the Euro Dist Cont Cell ), Euro Fund Dist Run-Off Cell (the Euro Dist Run-Off Cell ), Euro Fund Acc Cell (the Euro Acc Cont Cell ), Euro Fund Acc Run-Off Cell (the Euro Acc Run-Off Cell ), Euro Fund Class Y Run-Off Cell (the Euro Y Run-Off Cell ) Swedish Krona Fund Class X Cell (the SEK X Cont Cell ) Swedish Krona Fund Class X Run-Off Cell (the SEK X Run-Off Cell ) Sterling Fund Class X Cell (the Sterling X Cont Cell ), Sterling Fund Class X Run-Off Cell (the Sterling X Run-Off Cell ), Sterling Fund Dist Cell (the Sterling Dist Cont Cell ), Sterling Fund Dist Run-Off Cell (the Sterling Dist Run-Off Cell ), Sterling Fund Acc Cell (the Sterling Acc Cont Cell ), Sterling Fund Acc Run-Off Cell (the Sterling Acc Run-Off Cell ), Meteor Senior Life Settlements Sterling Fund (the Meteor Cont Cell ), Meteor Senior Life Settlements Sterling Fund Run-Off (the Meteor Run-Off Cell ), Meteor Senior Life Settlements Sterling Fund II (the Meteor II Cont Cell ), Meteor Senior Life Settlements Sterling Fund II Run-Off (the Meteor II Run-Off Cell ), WAY Life Settlements Fund Cell (the WAY Cont Cell ), and WAY Life Settlements Fund Run-Off Cell (the WAY Run-Off Cell ). Page 3

5 Directors Report (continued) Group structure The Group s investments in life policies are held by EEA Life Settlements Inc, a corporation registered in Delaware, USA, which is a wholly owned subsidiary of EEA Life Settlements Master Fund II Limited ( Master Fund II ), a company registered in Guernsey. EEA Life Settlements Master Fund Limited ( Master Fund ) and Master Fund II are wholly owned subsidiaries of EEA Life Settlement Holdings Limited, a company registered in Guernsey. The Cells invest in EEA Life Settlement Holdings Limited. Results and dividends The results for the year are set out in the Consolidated Statement of Comprehensive Income on page 9. There were no distributions paid by the Company during the years ended 31 December 2014 and Directors The Directors of the Company who served during the year and to date are as stated on page 1. Directors interests The Directors, except Alison Simpson, have no disclosable interests in the shares of the Company. Alison Simpson holds an interest of 726 (2013: 726) shares in the Company s Sterling Acc Cell at 31 December Alison Simpson is a Director of the Administrator, Secretary and Registrar of the Company, International Administration Group (Guernsey) Limited. Chris Daly is Managing Director of ViaSource Funding Group LLC, which is the Investment Adviser. Simon Shaw is the Chairman and principal shareholder of EEA Fund Management Limited and a director of EEA Fund Management (Guernsey) Limited. Restructuring and going concern The Board proposed a restructuring of the Fund which was approved by shareholders at the 17 October 2013 EGM and Class Meeting. Implementation of the restructuring gained the necessary regulatory approvals by the Guernsey Financial Services Commission and the dealing suspension, which had been in place since 30 November 2011, was lifted on 1 January The restructured Fund includes (i) a continuation fund with additional dealing restrictions, and (ii) a run-off vehicle with periodic distributions as policies mature and proceeds are received. The continuation fund continues to invest in the Fund s current portfolio of assets and investments and also any future investments made by the Fund using the pro rata share of proceeds received on maturities/realisations attributable to continuing shares, such future investments to be made via the Fund investing in units issued by a newly established Irish unit trust fund. For option (ii) shares were re-designated on a onefor-one basis for participating redeemable preference shares in a newly created run-off cell. Cash distributions will be made from that run-off cell s pro rata share of the proceeds received on maturities/realisations of investments. It is intended, that in the future there will be an opportunity where new investors are sourced who are willing to purchase shares from run-off investors at a discount to net asset value. New investors will then have an option to acquire shares in a cell of the continuation fund. The Fund has sufficient available cash to meet premium and other obligations for the foreseeable future. In addition, the lock in and redemption gate provisions within the restructuring arrangements are sufficient to ensure the Fund s continued ability to do so. The Fund therefore continues to adopt the going concern basis in preparing the consolidated financial statements. Page 4

6 Directors Report (continued) Format of report and audited consolidated financial statements These consolidated financial statements show the results and state of affairs of the Group as a whole which includes the Cells, the Master Fund, Master Fund II, EEA Life Settlement Holdings Limited and EEA Life Settlements Inc as at 31 December The financial statements of the individual cells are available on request from International Administration Group (Guernsey) Limited. Directors responsibilities The Directors are responsible for preparing consolidated financial statements for each accounting period which show a true and fair view of the state of affairs of the Group and its results of operations for the year. In preparing these consolidated financial statements the Directors are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; state whether applicable accounting standards have been followed subject to any material departures as disclosed in the consolidated financial statements; and prepare the consolidated financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business. The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Group and to enable them to ensure that the consolidated financial statements comply with The Companies (Guernsey) Law, 2008, and The Authorised Collective Investment Schemes (Class B) Rules They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud, error and non compliance with law or regulation. So far as each of the directors is aware, there is no relevant audit information of which the Group s auditor is unaware, and each has taken all the steps he/she ought to have taken as a director to make himself/herself aware of any relevant audit information and to establish that the Group s auditor is aware of that information. Auditors Grant Thornton Limited have indicated their willingness to continue in office. A resolution to reappoint Grant Thornton Limited will be proposed at the forthcoming Annual General Meeting. David Jeffreys Director 18 June 2015 Page 5

7 Independent Auditor s Report To the Members of EEA Life Settlements Fund PCC Limited We have audited the consolidated financial statements of EEA Life Settlements Fund PCC Limited (the Group ) for the year ended 31 December 2014 which comprise the Consolidated Statement of Comprehensive Income, Consolidated Statement of Changes in Net Assets Attributable to Holders of Participating Shares, Consolidated Statement of Financial Position, Consolidated Statement of Cash Flows and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board. This report is made solely to the Group s members, as a body, in accordance with Section 262 of The Companies (Guernsey) Law, 2008 and Paragraph 4.02(3) of The Authorised Collective Investment Schemes (Class B) Rules Our audit work has been undertaken so that we might state to the Group s members those matters we are required to state to them in an auditors report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Group and the Group s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors As explained more fully in the Directors Responsibilities Statement on page 5, 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 legal and regulatory requirements 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 Group 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 and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. 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 Group s affairs as at 31 December 2014 and of its loss for the year then ended; have been properly prepared in accordance with IFRSs as issued by the IASB; and have been prepared in accordance with the requirements of The Companies (Guernsey) Law, Page 6

8 Independent Auditor s Report (continued) Emphasis of matter Investment Valuation In forming our opinion, we have considered the adequacy of the disclosures made in Note 1 in the financial statements concerning the uncertainty relating to the carrying value of the investments in life insurance policies included in the Consolidated Statement of Financial Position. As explained in Note 1, the investments are carried at fair value, determined using methodologies which involve judgments and estimates by the directors. These investments are not quoted in an active market and the value at which they will be realised is uncertain. Any adjustment to the carrying value of investments in the Consolidated Statement of Financial Position would have a corresponding impact on the Consolidated Statement of Comprehensive Income. Our opinion is not qualified in this respect. 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 we are required to report to you, if in our opinion: proper accounting records have not been kept by the Group; or the financial statements are not in agreement with the accounting records; or we have not obtained all the information and explanations, which to the best of our knowledge and belief, are necessary for the purposes of our audit. Grant Thornton Limited Chartered Accountants St Peter Port, Guernsey, Channel Islands 19 June 2015 Page 7

9 Report of the Custodian To the Members of EEA Life Settlements Fund PCC Limited We state that in our opinion, EEA Fund Management (Guernsey) Limited (the Manager ), has managed EEA Life Settlements Fund PCC Limited (the Company ): a) in accordance with the limitations imposed on the investment and borrowing powers of the Company by the principal documents, by the scheme particulars and by the Protection of Investors (Bailiwick of Guernsey) Law,1987; and b) in accordance with the provisions of the principal documents and The Authorised Collective Investment Schemes (Class B) Rules During 2013, we tendered our resignation as Custodian of the Company and this was communicated to shareholders in the Company's Restructuring Proposal. Pursuant to section 4.06 (1) of The Authorised Collective Investment Schemes (Class B) Rules 2013, we are obliged to continue in our role as Custodian of the Company until the Manager appoints a suitable replacement. BNP Paribas Securities Services SCA, Guernsey Branch 18 June 2015 Page 8

10 Consolidated Statement of Comprehensive Income for the year ended 31 December Note US$000 US$000 Income Net (losses)/gains on investments 4 (140,584) 48,613 Total (loss)/income (140,383) 48,769 Expenses 5 (17,500) (16,461) Net (loss)/income before and after distributions 6 (157,883) 32,308 Taxation 7 1,401 (6,166) (Loss)/profit from operating activities and change in net assets attributable to holders of participating shares (156,482) 26,142 Other comprehensive (loss)/income - movement in currency translation reserve (2,985) 706 Total comprehensive (loss)/income (159,467) 26,848 The above results relate to the continuing operations of the Group. Consolidated Statement of Changes in Net Assets Attributable to Holders of Participating Shares for the year ended 31 December Note US$000 US$000 Net assets attributable to holders of participating shares at beginning of the year 790, ,620 Amounts receivable on issues Amounts payable on redemptions 12 (13,790) - (13,602) - (Loss)/profit from operating activities and change in net assets attributable to holders of participating shares (156,482) 26,142 Other comprehensive (loss)/income - movement in currency translation reserve (2,985) 706 Net assets attributable to holders of participating shares at end of the year , ,468 The notes on pages 12 to 39 form an integral part of these financial statements. Page 9

11 Consolidated Statement of Financial Position as at 31 December Note US$000 US$000 Assets Non-current assets Investments at fair value through profit or loss 8 471, ,956 Current assets Tax recoverable 7 4,908 3,507 Debtors 9 21,101 13,645 Cash and cash equivalents ,090 91, , ,824 Total assets 619, ,780 Liabilities Current liabilities Creditors 10 (2,139) (3,312) Net assets attributable to holders of management and participating shares 617, ,468 Attributable to holders of: Management shares Participating shares , ,468 The financial statements on pages 9 to 39 were approved by the Board of Directors on 18 June 2015 and signed on its behalf by: David Jeffreys Director The notes on pages 12 to 39 form an integral part of these financial statements. Page 10

12 Consolidated Statement of Cash Flows for the year ended 31 December Note US$000 US$000 Operating activities Bank interest received Expenses paid (18,673) (17,126) Net cash outflow from operating activities 14 (18,475) (16,971) Investing activities Payment of premiums (70,015) (73,044) Proceeds from maturity/disposal of investments 135, ,091 Net cash inflow from investing activities 65,480 49,047 Financing activities Issue of participating shares Redemption of participating shares (13,790) - Net cash outflow from financing activities (13,602) - Tax paid - (6,745) Increase in cash and cash equivalents 33,403 25,331 Reconciliation of net cash flow to movements in cash and cash equivalents Cash and cash equivalents at start of year 91,672 65,635 Increase in cash and cash equivalents 33,403 25,331 Currency translation differences (2,985) 706 Cash and cash equivalents at end of year ,090 91,672 The notes on pages 12 to 39 form an integral part of these financial statements. Page 11

13 1. Organisation and Principal Accounting Policies Introduction EEA Life Settlements Fund PCC Limited ( Company or Fund ) was incorporated on 20 June 2005 in Guernsey and authorised under The Authorised Collective Investment Schemes (Class B) Rules The Company issued its first shares on 10 November 2005 and commenced active operations on that day. The investment objective of the Company is described in note 16. The Company has no employees. The listing on the Channel Islands Stock Exchange of the Company and its Cells was suspended on 30 November 2011 and was cancelled on 30 June On 1 January 2014, a Run-Off Cell was created for each active cell and Euro Y and Dollar I Cells were closed. The Company is divided into twenty eight active cells: the Dollar X Cont Cell, the Dollar X Run- Off Cell, the Dollar Dist Cont Cell, the Dollar Dist Run-Off Cell, the Dollar I Run-Off Cell, the Dollar Acc Cont Cell, the Dollar Acc Run-Off Cell, the Euro X Cont Cell, the Euro X Run-Off Cell, the Euro Dist Cont Cell, the Euro Dist Run-Off Cell, the Euro Acc Cont Cell, the Euro Acc Run- Off Cell, the Euro Y Run-Off Cell, the SEK X Cont Cell, the SEK X Run-Off Cell, the Sterling X Cont Cell, the Sterling X Run-Off Cell, the Sterling Dist Cont Cell, the Sterling Dist Run-Off Cell, the Sterling Acc Cont Cell, the Sterling Acc Run-Off Cell, the Meteor Cont Cell, the Meteor Run- Off Cell, the Meteor II Cont Cell, the Meteor II Run-Off Cell, the WAY Cont Cell and the WAY Run-Off Cell (collectively the Cells ). Group structure The Group s investments in life policies are held by EEA Life Settlements Inc, a corporation registered in Delaware, USA, which is a wholly owned subsidiary of EEA Life Settlements Master Fund II Limited ( Master Fund II ), a company registered in Guernsey. EEA Life Settlements Master Fund Limited ( Master Fund ) and Master Fund II are wholly owned subsidiaries of EEA Life Settlement Holdings Limited, a company registered in Guernsey. The Cells invest in EEA Life Settlement Holdings Limited. Restructuring and going concern The restructuring of the Fund was approved by shareholders at the 17 October 2013 EGM and Class Meeting. Implementation of the restructuring gained the necessary regulatory approvals by the Guernsey Financial Services Commission and the dealing suspension was lifted on 1 January The restructured Fund includes (i) a continuation fund with additional dealing restrictions, and (ii) a run-off vehicle with periodic distributions as policies mature and proceeds are received. The continuation fund continues to invest in the Fund s current portfolio of assets and investments and also any future investments made by the Fund using the pro rata share of proceeds received on maturities/realisations attributable to continuing shares, such future investments to be made via the Fund investing in units issued by a newly established Irish unit trust fund. For option (ii), shares were re-designated on a one-for-one basis for participating redeemable preference shares in a newly created run-off cell. Cash distributions will be made from that run-off cell s pro rata share of the proceeds received on maturities/realisations of investments. It is intended, that in the future there will be an opportunity where new investors are sourced who are willing to purchase shares from run-off investors at a discount to net asset value. New investors will then have an option to acquire shares in a cell of the continuation fund. Page 12

14 1. Organisation and Principal Accounting Policies (continued) The Group has sufficient available cash to meet premium and other obligations for the foreseeable future. In addition the lock in and redemption gate provisions within the restructuring arrangements are sufficient to ensure the Group s continued ability to do so. The Group therefore continues to adopt the going concern basis in preparing the consolidated and cellular financial statements. Basis of accounting The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and interpretations issued by the International Accounting Standards Board (IASB). IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on 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 that are not apparent from other sources. Actual results may differ from these estimates. The consolidated financial statements are presented in United States Dollars and are rounded to the nearest US$000 unless otherwise indicated. Basis of preparation The consolidated financial statements have been prepared under the historical cost convention except for the measurement of investments which are designated as fair value through profit or loss. The consolidated financial statements are presented in US Dollars (presentational currency of the Group) and not Sterling, the local currency of Guernsey, since the majority of the Group s assets are denominated in US Dollars. Standards, amendments and interpretations effective during the year The following standards, amendments and interpretations were applicable for the first time this year (all effective 1 January 2014) but had no impact on the financial position or performance for the Company: Amendments to IFRS 10 Consolidated Financial Statements and IFRS 12 Disclosure of Interests in Other Entities on consolidation for investment entities Amendments to IAS 39 Financial Instruments: Recognition and Measurements on novation of derivatives and continuation of hedge accounting Amendments to IAS 32: Financial Instruments: Presentation relating to the offsetting of assets and liabilities Standards, amendments and interpretations to existing standards that are not yet effective and have not been adopted early by the Group At the date of authorisation of these financial statements, certain new standards, and amendments to existing standards have been published by the IASB that are not yet effective, and have not been adopted early by the Group. Information on those expected to be relevant to the Group s financial statements is provided below. The directors anticipate that all relevant pronouncements will be adopted in the Group s accounting policies for the first period beginning after the effective date of the pronouncement. New standards, interpretations and amendments not either adopted or listed below are not expected to have a material impact on the Group s financial statements. The IASB has issued the following standards with an effective date after the date of these financial statements: Page 13

15 1. Organisation and Principal Accounting Policies (continued) IFRS 9 Financial Instruments (2014) The IASB recently released IFRS 9 Financial Instruments (2014), representing the completion of its project to replace IAS 39 Financial Instruments: Recognition and Measurement. The new standard introduces extensive changes to IAS 39 s guidance on the classification and measurement of financial assets and introduces a new expected credit loss model for the impairment of financial assets. IFRS 9 also provides new guidance on the application of hedge accounting. The directors have yet to assess the impact of IFRS 9 on these consolidated financial statements. The new standard is required to be applied for annual reporting periods beginning on or after 1 January IFRS 15 Revenue from Contracts with Customers IFRS 15 presents new requirements for the recognition of revenue, replacing IAS 18 Revenue, IAS 11 Construction Contracts, and several revenue-related Interpretations. The new standard establishes a control-based revenue recognition model and provides additional guidance in many areas not covered in detail under existing IFRSs, including how to account for arrangements with multiple performance obligations, variable pricing, customer refund rights, supplier repurchase options, and other common complexities. IFRS 15 is effective for reporting periods beginning on or after 1 January The directors have not yet assessed the impact of IFRS 15 on these consolidated financial statements. Basis of consolidation The consolidated financial statements include the financial statements of the parent company and its wholly owned subsidiaries, the Master Fund, Master Fund II, EEA Life Settlements Holdings Limited and EEA Life Settlements Inc. The parent company controls a subsidiary if it is exposed, or has rights, to variable returns from its involvement with the subsidiary and has the ability to affect those returns through its power over its subsidiary. All subsidiaries have a reporting date of 31 December. The financial statements of the Group represent the aggregation of the results and financial position of each of the individual cells and subsidiaries adjusted for the elimination of intra-group transactions and balances. The aggregated financial position of the Company also includes the non-cellular assets and share capital of 100. Foreign currency translation Foreign currency assets and liabilities for each cell are translated into the functional currency, which may differ from cell to cell, being the currency in which the shares in each cell are issued, at the rate of exchange ruling at the reporting date. Transactions in foreign currencies are translated at the rate of exchange ruling at the date of the transaction. Gains and losses arising on revaluation of foreign currency assets and liabilities are recorded in the Consolidated Statement of Comprehensive Income. For the purpose of the Group financial statements, cellular assets and liabilities are translated into the presentation currency (US Dollars) at the rate of exchange ruling at the reporting date. Exchange differences arising on preparation of the Group s financial statements from the financial statements of Cells maintained in currencies other than US Dollars are recognised in other comprehensive income and are taken to the currency translation reserve. These exchange differences do not affect the value of each Cell. Income recognition Bank interest is accounted for on an accruals basis. Page 14

16 1. Organisation and Principal Accounting Policies (continued) Expenditure Expenses are accounted for on an accruals basis. Financial instruments a. Recognition and initial measurement Financial assets and financial liabilities are recognised when the Group becomes a party to the contractual provisions of the financial instrument and are measured initially at fair value adjusted for transaction costs, except for those carried at fair value through profit or loss which are measured initially at fair value. Subsequent measurement of financial assets and financial liabilities is described below. b. Classification and subsequent measurement of financial assets For the purpose of subsequent measurement financial assets, other than those designated and effective as hedging instruments, are classified into the following categories upon initial recognition: loans and receivables financial assets at fair value through profit or loss (FVTPL) (i) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial recognition, these are measured at amortised cost using the effective interest method, less provision for impairment. The Group s cash and cash equivalents and debtor accounts fall into this category of financial instruments. Individually significant receivables are considered for impairment when they are past due or when other objective evidence is received that a specific counterparty will default. (ii) Financial assets at FVTPL Financial assets at FVTPL include financial assets that are either classified as held for trading or that meet certain conditions and are designated at FVTPL upon initial recognition. All derivative financial instruments fall into this category, except for those designated and effective as hedging instruments. Assets in this category are measured at fair value with gains or losses recognised in profit or loss. The fair values of financial assets in this category are determined by reference to active market transactions or using a valuation technique where no active market exists. Investments in life policies are classified into this category. c. Classification and subsequent measurement of financial liabilities Financial liabilities are measured subsequently at amortised cost using the effective interest method, except for financial liabilities held for trading or designated at FVTPL, that are carried subsequently at fair value with gains or losses recognised in profit or loss. All derivative financial instruments that are not designated and effective as hedging instruments are accounted for at FVTPL. The Group s financial liabilities include trade and other payables and participating shares of the Continuing Cells. Page 15

17 1. Organisation and Principal Accounting Policies (continued) d. Derecognition Financial assets are derecognised when the contractual rights to the cash flows from the financial asset expire, or when the financial asset and all substantial risks and rewards are transferred (e.g. investment in life policies reach maturity). A financial liability is derecognised when it is extinguished, discharged, cancelled or expires. Investments in life policies Investments are classified as fair value through profit or loss. These financial assets are so designated on the basis that they are part of a group of financial assets which are managed and have their performance evaluated on a fair value basis. Investments are initially recognised at the fair value of the consideration given excluding transaction costs. The Directors consider that there is sufficient market data available as a result of a recovery in the life settlements market and a notable increase in transaction data to use market based discount rates in the valuation process with effect from 31 December 2014 rather than using the past mortality experience of the Fund s policies. The Board has therefore appointed Maple Life Analytics LLC, as an independent valuation agent to the Fund. From 31 December 2014, the life insurance policies are valued on the basis of their estimated present value, taking into account anticipated future death benefits less anticipated future premiums. Each set of cash flows is discounted using the latest life expectancy estimates and a market discount rate, which in part reflects the annual return the market expects when buying policies and also the confidence the market has in the accuracy of the life expectancy estimates provided by the life expectancy provider. As a result, the market discount rate may vary depending on the life expectancy provider. The average discount rate used in respect of the 31 December 2014 valuation is approximately 18%. In the comparative accounting period, the methodology for valuation of the life insurance policies took into account the past mortality experience of the Fund s policies but recognised that there are insufficient data to reach statistically reliable conclusions. The valuation therefore used the actuarial concept of credibility where a statistically reliable valuation would have full credibility, while a zero credibility valuation would be one which takes no account of the Fund s mortality experience. These terms are used further below. Following a review of estimated life expectancies ( LEs ) carried out by a third party expert during 2013, the Directors decided with effect from 30 June 2013 to adopt the revised LEs for those policies subject to that review. Where policies had not been so reviewed, 33 months were added to the original LEs, being a typical adjustment recorded to those LEs which had been reviewed. For the purposes of calculating the valuation used in the financial statements as at 31 December 2012, the aforementioned adjustments were deemed to accrue on a straight line basis over the period from 31 December 2011 to 30 June In addition, where a policy had passed its LE, the Investment Adviser has re-assessed the policy and determined an updated LE. In order to arrive at the valuation used in the 31 December 2013 financial statements, two values were calculated and then adjusted as described further below: 1. Zero credibility valuation A zero credibility valuation is a valuation based on discounted cash flows whereby the date of death was expected to be at LE. Page 16

18 1. Organisation and Principal Accounting Policies (continued) A discount rate was determined from the internal rate of return from policies purchased over recent years. These rates were high relative to the risk-free rate and relatively stable, implying that the market valued these contracts as high risk and not on a basis relative to interest rates for liquid securities. Based on consideration of these points, a rate of 19% pa was used to discount the cash flows. For policies which had passed their date of death implied by the LE estimate, the calculation used the updated LE determined by the Investment Adviser. 2. Full credibility valuation A full credibility valuation is a valuation based on an industry standard actuarial methodology. This methodology uses the revised LE together with published mortality tables to produce a probability distribution for the date of death. For the valuation at 31 December 2013, a discount rate of 8.00% was used. This was derived by taking the residual mortality risk as broadly equivalent to the credit risk on junk bonds. Reference was made to the Bank of America Merrill Lynch US High Yield Index which had a rate of 6.39%. An illiquidity premium of 1.5% was considered reasonable and added to arrive at 8.00%. The Directors then attributed a relative credibility to each valuation determined by reference to industry guidance and practice on credibility as applied to the circumstances of the Fund. Based on actuarial industry guidance, the full credibility valuation had a credibility weighting of 61% as at 31 December The balance of 39% was used as the credibility weighting for the zero credibility valuation for the valuation at 31 December The resulting weighted values were then added together to arrive at the valuation at 31 December 2013 used in the financial statements. Realised gains and losses on the disposal or maturity of investments are calculated by reference to the net proceeds received on disposal or maturity and the actual cost, which comprises initial consideration and premiums, attributable to those investments. Profits and losses on investments are included in comprehensive income. Formation and reorganisation expenses Expenses incurred in the formation of the Company and the restructurings of the Group on 1 September 2006, 1 March 2010 and 1 January 2014 have been taken to the Consolidated Statement of Comprehensive Income as incurred. For the purposes of the calculation of the Dealing Price the formation and restructuring expenses are amortised over five years. Income Taxes Tax income/expense recognised in profit or loss comprises the sum of deferred tax and current tax not recognised in other comprehensive income or directly in net assets attributable to holders of management and participating shares. Current income tax assets and/or liabilities comprise those obligations to, or claims from, fiscal authorities relating to the current or prior reporting periods, that are unpaid at the reporting date. Current tax is payable on taxable profit, which differs from profit or loss in the financial statements. Calculation of current tax is based on tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period. Page 17

19 1. Organisation and Principal Accounting Policies (continued) Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Deferred tax is charged or credited in the income statement. Participating shares A financial instrument that provides for redemption on a specific date or at the option of the holder meets the definition of a financial liability if the issuer has an obligation to transfer financial assets to the holder of the share. Accordingly the participating shares of the continuing cells have been classified as financial liabilities in accordance with IAS 32. The participating shares of the run-off cells may only be redeemed at the absolute discretion of the Directors and are accordingly classified as equity. Cash and cash equivalents Cash and cash equivalents are defined as cash in hand, demand deposits and highly liquid investments readily convertible within three months from the date of acquisition or less to known amounts of cash and subject to insignificant risk of changes in value. Distributions to shareholders Distributions to shareholders are recognised in the Consolidated Statement of Comprehensive Income as finance costs because the participating shares are classified as financial liabilities. Use of judgements and estimates In the process of applying the Group s accounting policies, the Directors are required to make certain judgements and estimates to arrive at fair value for its assets and liabilities. Significant areas requiring the Directors judgement include taxation (see note 6) and the fair value of investments. In calculating the fair value of investments, key estimates include the life expectancy of insureds and the discount rate applied to future cash flows. In light of the judgements applied, disclosures are provided in note 16 which show the impact on the value of investments using different assumptions for life expectancy and discount rates. 2. Material Agreements a) Management fee The Manager is entitled to receive a fee from the Cells at the rate of 1.5% per annum (Way Cell %, Dollar I Cell - 1%) of the Net Asset Value of the Cells, calculated in line with the method set out in the prospectus. The fee is calculated at the end of each month and is payable quarterly in arrears. A new management agreement dated 31 December 2013 extended the existing arrangements to the new run-off cells with effect from 1 January b) Performance fee During the year the Manager and the Investment Adviser were entitled to receive a performance fee at the end of each performance period (a Performance Period ) where the performance during the period exceeds the hurdle (the Hurdle ). The excess of the Cell s performance over the Hurdle is payable 37.5% to the Manager and 37.5% to the Investment Adviser (Dollar I Cell - 20% of net increase in the Dealing NAV adjusted for subscriptions and redemptions). A Performance Period was the six month period ending on 30 June or 31 December and the Hurdle is 8% per annum. The basis of the calculation is the Net Asset Value of the Cells in line with the method set out in the prospectus. Page 18

20 2. Material Agreements (continued) Following the restructuring the fee basis was modified such that it is calculated at a Cell level at the existing percentage rates, on the excess of the proceeds of maturities of policies (net of premiums paid), over and above a hurdle rate of 8% per annum from their value at 30 June The fee will not become payable until the final policy matures or is realised. Any fees accrued under prior existing arrangements were waived under the new management agreement. No performance fees were paid during the year. c) Acquisition fee The Investment Adviser is entitled to receive an acquisition fee of 1% of the purchase price in the case of life policies purchased. d) Custodian fee The Custodian was entitled to receive a fee at the rate of 96,000 per annum until 31 March 2014 and at a rate of 392,000 per annum thereafter (2013: 7,000 per Cell) subject to a minimum of 70,000 per annum. In addition, the Custodian is entitled to be reimbursed for any out of pocket expenses together with any sub-custodian fees. e) Administration fee The Administrator is entitled to receive fees at a rate of 0.15% per annum of the Net Asset Value of the Master Fund II up to US$50 million and 0.1% per annum of its Net Asset Value thereafter. The fee is subject to a minimum of 1,000 per month per funded Cell. The Administrator is also entitled to be reimbursed for all out-of-pocket expenses in connection with the carrying out of its duties. For acting as registrar, the Administrator receives fees from each Cell based on the number of investor transactions and the number of registered shareholders. f) Sub-Custodian fee The Sub-Custodian is entitled to charge EEA Life Settlements Inc a fixed annual fee of US$75,000 payable monthly in arrears and the reimbursement of all out-of-pocket expenses. g) Servicing Agent fee The Servicing Agent is entitled to charge a one time review fee of US$570 (2013: US$450) per policy. In addition, there is an annual standing charge of US$5,000 (2013: US$300 per policy), payable quarterly in advance, subject to a minimum of US$2,000 (2013: US$1,500) per month. In addition, as a calculation agent, the Servicing Agent charges an annual fee of US$450 per policy. h) Distribution fee/marketing expense The Manager is entitled to receive a distribution fee of up to 5% from the Dollar X, Euro X, Sterling X and SEK X Cells of the total amount subscribed by an investor and may rebate any part of the fee back to the investor for further subscriptions into the relevant Cell. Distribution fees are accounted for on an accruals basis net of rebates. No marketing expenses and rebates were recognised during 2014 and i) Investment Advisory fee Commencing 2014, the investment adviser is entitled to receive 0.1% of the Net Asset Value of each Cell attributable to investments in life policies in addition to US$100 per month per policy held payable by EEA Life Settlements Inc monthly in arrears. Page 19

21 3. Income US$000 US$000 Bank interest income Net (losses)/gains on investments US$000 US$000 Proceeds from maturity of investments 142, ,794 Cost of investments matured (109,402) (82,680) Realised gains on investments 33,546 47,114 Movement in unrealised gains and losses on revaluation of investments (174,130) 1,499 Net (losses)/gains on investments during the year (140,584) 48, Expenses US$000 US$000 Performance fee (note 2b) - (116) Management fee (note 2a) 12,401 13,697 Administration fee (note 2e) 1,273 1,124 Investment advisory fee (note 2i) 1, General expenses * Sub-custodian fee (note 2f) 75 (151) Audit fee Servicing agent fee (note 2g) Custodian fee (note 2d) Legal fees Directors fees ** (note 17) ,500 16,461 * Includes US$29,511 ( 17,500) in respect of fees paid to BWCI Limited for the mortality investigation. ** Directors fees include US$ 208,000 (2013: US$325,000) in respect of consultancy fees. 6. Distributions No distributions were declared and paid during the years ended 31 December 2014 or Page 20