AUDITORS who conducted a forensic investigation into the affairs of First Mutual Life Assurance (FML) have questioned an investment made by the firm into a local insurance company and raised fears the deal resulted in revenue leakages.
BRENNA MATENDERE
FML is the second-largest life assurance company in Zimbabwe after Old Mutual by market share and also provides retirement, medical insurance, micro-insurance and other long-term financial security products.
The company is a wholly-owned subsidiary of First Mutual Holdings Limited (FMHL) which provides primary individual and group life assurance cover. The forensic audit was conducted by BDO and RIMCA Solutions.
They investigated the treatment of realised and unrealised gains for both policyholders and shareholders over the investigation period stretching from 1 February 2009 to December 2021.
In response to a directive from the Insurance and Pensions Commission (Ipec) issued in 2007 requesting FMHL to reduce its 65% shareholding in Tristar, FMHL sold 57.3% of its stake in Tristar to FML policyholders and shareholders in March 2008. Subsequently, a call for capital was made to group companies to subscribe to the investment in Tristar on 25 March 2008.
FML policyholders and shareholders followed their rights and maintained their shareholding.
However, FML shareholding in Tristar resulted in losses being incurred by the company from 2009 to 2017 when it was eventually disposed. In an investment committee meeting, a call for capital was made by Tristar as it was experiencing solvency strains which was causing it not to write any new business.
FML policyholders invested U5$350 000, and the company also transferred a building with a book value of US$200 000 co-owned by policyholders and shareholders in lieu of an actual cash injection as capital.
However, the auditors detected potential abuse of funds in this deal.
“We were not availed the fair valuation report of the building at the date of transfer hence we could not verify if the amount at which it was transferred reflected fair value,” reads part of the auditors’ report.
“We could not get a satisfactory explanation as to why policyholders were made to inject capital into Tristar, a company which was experiencing solvency strains as reported in the Board minutes of 2 September 2009.”
The auditors also questioned delays in implementing an Ipec corrective order. On 13 May 2012, Ipec issued a corrective order indicating that the shareholding structure in Tristar was opaque and confusing.
The corrective order stated that there was a need to rationalise FML shareholding in in Tristar and transfer Tristar shareholding to AFRE Corporation as the rightful owner of the business.
“The shares were eventually sold in 2018, however, we were not availed information to show how the selling price was determined and if it reflected fair value. We could also not verify how much was received from the sale and how it was accounted for.
“We however noted that the investment in Tristar had a carrying amount of US$819 000 when the corrective order was issued in 2012 and the amount had dropped to US$23 129 when it was eventually sold 6 years later. This means the delay in the disposal resulted in a financial loss to the policyholders of US$795 891,” reads the report.
The auditors said FMHL group chief executive officer Douglas Hoto stated that FMHL sought to capacitate Tristar through investment by its group companies.
At the time of reinvestment, FML Policyholders made a Zimbabwe dollar investment in Tristar in an effort to mitigate against the inflation risk associated with a currency that subsequently became defunct.
This investment was made alongside the FML shareholder and FMRE. By 2008 the policyholder was now a shareholder, and all shareholders followed their right to ensure business continuity and protecting their investment.
Subsequent to 2008, the shareholder continued to put money into the business to sustain its operation. Regarding delays in implementing the Ipec’s corrective order, Hoto told auditors that the company made sure that FML policyholders did not follow their rights in all subsequent rights offers and this resulted in the FML policyholder interest in Tristar being diluted from 35% to 1.06% over six years.
“At each juncture, FML shared progress reports with Ipec and advised how the business was disinvesting and no adverse comments were received. Loss as a result of the delay in implementing the corrective order should be made good by the shareholder,” said the auditors in their recommendations.
