Monthly Archives: October 2013

Alternative Asset Opportunities update

Last year when I first wrote about Alternative Asset Opportunities (TLI.L) I was very enthusiastic since the fund promises to deliver high returns that are uncorrelated to the market since it invests in life insurance policies. I quickly realized that the estimated life expectancies were probably too optimistic, but that possible returns were still attractive. This week the fund released the final results for the fiscal year that ended 30 June 2013, so a good moment to check how the thesis is playing out so far.

Life expectancies

Last year wasn’t a very good year (for investors); the old guys and gals apparently didn’t feel like dying. The fund started the year with $166 million in face value of policies, and based on the average age of the insured (88.7 years) and the CDC 2008 life tables you would have expected that ~14% of the population wouldn’t survive the end of the year. The result didn’t come close to this number, and the few realized policies weren’t particularly large. An updated overview of the historical policy maturities, and the differences between the expected values and realized values is provided in the table below:

TLI.L historical policy maturitiesWhat’s also visible is that the fiscal year 2014 has a strong start, mainly thanks to one big $5 million policy that reached maturity. But at the same time it’s clear that the number of policies that mature is consistently lower than what would have been expected based on the CDC 2008 life tables. The annual report contains an excellent in-depth discussion about this issue, and the company has opted for a more conservative approach to estimate LE’s:

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

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

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

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

I think that it’s probable that the new third party LE provider is closer to the mark with regard to the true life expectancies than the other LE providers. In my valuation I’m actually expecting that the average LE could be 3 years higher than the expectations from the CDC 2008 tables. While the company has adjusted their life expectancies upwards they are still slightly below the probabilities of the 2008 tables. I found this quote also interesting:

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

Premiums paid

One thing that I missed in my initial valuation is that the company is apparently paying increasingly higher premiums. Last year the TLI paid $8.2 million in premiums (while expecting a $8.4 million bill) and it’s expecting to pay $8.7 million this year if there are no further policy maturities. So they are now paying more while they have a slightly lower amount of active policies. To account for this I have updated my model with the assumption that premiums for existing policies will increase with 5%/year.

The result of this new assumption is that the expected return drops from ~9% to ~7.5% at today’s share price. It’s certainly not a spectacular expected return, but given the low correlation with the market it’s still pretty good. And it should be noted that this is the expected return after assuming that the LE’s should be adjusted upwards by a full three years. I certainly think the LE’s of the company are too optimistic, but escaping death is getting pretty hard once you have a group of people with an average age of 89.6 years. Giving them a full three years higher LE than the general population might be overly generous, and if it’s in fact ‘just’ two years higher – in line with the expectations of the new LE provider – you are already looking at a 10% return.


Author is long Alternative Asset Opportunities (TLI.L)

More from Singapore: Nam Lee Pressed Metal Industries

Another name in the boring and cheap category from Singapore is Nam Lee Pressed Metal Industries. It’s a family business that designs and manufacture metal products for the housing industry and aluminium frames for container refrigeration units. The company is headquartered in Singapore but also has production facilities in Malaysia, Indonesia and China. As usual I’ll start with some quick valuation metrics:

Last price (Sep 27, 2013): 0.30 SGD
Shares outstanding: 241,159,000
Market cap: 72.3M SGD (57.4M USD)
Free float: 41%
P/B (mrq): 0.63x
P/E (ttm): 7.4x
EV/EBIT (ttm): 2.9x


The metric that looks the best is the EV/EBIT ratio because the company has a large cash position. If we count a recent bond investment also as a cash equivalent the company has 16 cents per share in cash while the shares trade at 30 cents. The net cash position has been depressing their return on equity, but it is on average still a very respectable 11% since 2007. It’s good to see that even in 2009 when revenue was down sharp it was still profitable:

Historical financials Nam Lee Pressed MetalsThe historical financials paint the picture of a solid, but not a spectacular business. The quality of their reported earnings seems to be fine based on how much is converted to cash flow. The FCF for the TTM doesn’t look good, but I think it’s probably a positive. The low free cash flow is mainly caused by increased investments in working capital (inventory and account receivables) due to higher sales and projects picking up pace. Unfortunately the gross margin is down significantly compared to last year, but not outside the historical range. No immediate reason for panic.

What’s also positive is that the company has been paying a decent dividend that averages 33% of net income. I think they could return a bit more money to shareholders given how much cash they have, but you can also see in the recent results how quickly cash can disappear when more working capital is required. The family probably prefers to finance the business conservatively and keeping some cash on hand is totally fine with me.


The valuation of a stable manufacturing company is straightforward, and the main question is what you think the cost of capital of this firm should be. I think something around 10% is reasonable, maybe a bit more,  which would imply the firm is worth approximately 10 times earnings plus the value of the non operating assets. Net income for the TTM is 9.7M SGD while the 7 year average is 9.1M SGD. This would imply a valuation around 130M SGD, or almost two times the current market cap.


Nam Lee Pressed Metal was founded by the Yong family in 1975 and three of six members of the board are family members who have been with the company since it’s inception. The family still owns almost 60% of the stock and they appear to be shareholder friendly by paying out a decent percentage of income as dividends. It’s of course a question what the company is exactly going to do with the large amount of cash on the balance sheet, but insiders certainly have the right incentive given how much of the company they own. What’s a slight positive is that the high cash balance is a recent phenomenon.


One specific risk that the company faces that deserves some discussion is the following:

A major customer accounts for a substantial portion of our revenue. We are therefore dependent, to certain extent, on this major customer, as any cancellation of its sales and purchases would have an impact on our operations. Although we have long-term contract with our major customer, it may alter its present arrangements with us to our disadvantage, which would in turn have an impact on our operating income, business and financial position and consequently, our operating profits may, to a material extent, be adversely affected.

The big customer (I’m guessing it’s Carrier) buys aluminium frames for container refrigeration units and is responsible for more than 50% of revenue:

In the current financial year, revenue from two major customers amounted to $89 million (2011: $114 million) arising from sales by the aluminium segment and $11 million (2011: $15 million) arising from sales by the aluminium and mild steel segments respectively.

Being dependent on one customer for a big part of your revenue is a major risk risk, but the company does have a few things going for it. It has a long relation with this customer, so apparently both parties are happy with the status quo. The oldest annual report I could find online was from 2008 and since then nothing has really changed. Nam Lee is also the only worldwide third-party manufacturer of aluminium frames that is used by this customer. It’s not the only supplier, but the other suppliers are related parties that are located in the US.


Nam Lee Pressed Metal Industries is a boring but solid business. Their customer concentration is the only major risk factor I see, but given the amount of cash on the balance sheet the downside is somewhat limited. I also think that there is no real reason to believe that this will become a problem anytime soon given how it hasn’t been a problem in the past. In the end this idea is very similar to the earlier discussed Spindex Industries: both are cash rich businesses with high insider ownership, decent returns on equity and a nice dividend yield. If I would have a lot of cash laying around I would probably buy some shares.


No position in Nam Lee Pressed Metal Industries