FIRST Mutual Life Assurance’s (FML) accounting system has come under scrutiny amid revelations that there has been an overstatement of assets and capital guarantee charges, prejudicing policyholders, a forensic investigation has revealed.
NATHAN GUMA
FML, a wholly-owned subsidiary of First Mutual Holdings Limited (FMHL) which is Zimbabwe’s second-largest life assurance company by market share, provides retirement, medical insurance, micro-insurance and other long-term financial security products.
In 2022, the Insurance and Pensions Commission (Ipec), a statutory body, launched a forensic investigation into the affairs of FML over its failure to separate assets between shareholders and policyholders.
The audit by actuarial experts BDO Chartered Accountant Zimbabwe and Rimca Solutions, completed on 17 February 2023, has opened a can of worms showing serious over-statements which have been prejudicing policyholders.
Findings by the audit have shown that FML was using wrong accounting methods between 2009 and 2015, giving a false impression that it was in a financially favourable position.
From 2009 until the 2015 financial year, the company was using equity accounting for its investment in First Mutual Properties (FMP), which was not permitted under International Accounring Standard (IAS) 27 accounting system during that period.
“No impairment write downs were done. Since the shares in FMP were listed, FML management should have used the fair value approach guided by IFRS and IAS 39,” reads the audit.
“From 2009 until 2015, the preparation of separate financial statements was guided by paragraph 38 in IAS. It states that in separate financial statements, investments in subsidiaries, jointly controlled entities shall be accounted for either at cost, in accordance with the IFRS9 and IAS 9 effective January 1 2016, IAS was amended to allow a third option of equity accounting which requires that the resultant figure should be tested for impairment as guided by IAS 36.”
FML also made a serious overstatement of its assets, raising the risk of misrepresenting the company’s financial health, and investors, creditors, and other stakeholders.
The company was recording consolidated financial statements with First Mutual Properties, in which it owned a 59.247% stake as at December 2021. “FMP bears a huge significance in the operations, financial states and solvency of FML.
How is it reported and presented in the FML financial statements is very important in establishing the financial well-being of FML.
“FML is a regulated entity under the Insurance Act (Chapter 24.07) and its solvency should be assessed at company level. Its returns to Ipec should also be based on its company financial statements and this was the case until the 2009 financial year. From the 2010 financial year until 2020, however, the board was using FML consolidated financial statements for solvency assessments and filing returns to the regulator.
“This approach was incorrect as the consolidated financial statements incorporated other entities which had nothing to do with the life business. This resulted in FML reporting a more favourable financial position when in actual fact it was technically insolvent. The analysis shows the impact used consolidated figures as at 31 December each year on the solvency position that was reported by FML.”
The audit also revealed that the First Mutual Wealth (FMW) money market fund was charging investment fees on the investment in the FMP from 2009 up to 2017, which Ipec says should not have been done.
FMW is a short-term interest-earning fund tailor-made for investors seeking periodic and certain income while preserving the capital invested. The fund invests in a broad selection of fixed income securities such as Treasury Bills, Bankers’ Acceptances (BAs), Debentures, Commercial Paper, Negotiable Certificates of Deposit (NCDs) and other Fixed Deposit Instruments.
“At first the rate was 2% p.a. on the ZSE market values of the FMP from 2009 to June 2012. Then effective 1 July 2012, a rate of 0.9% p.a. was applied. This is despite the fact that the manager did not exercise any discretion or could make any decision on the investments other than only executing instructions from the FMHL,” reads the audit report.
“That charging of investment management fees on the FMP investment was subsequently suspended reinforces our view that the fees should not have been charged in the first place. However, charging of fees was resumed in July 2021, albeit at a lower rate of 0.3% of the market value.
“No satisfactory answer could be given on why charging of investment management fees was suspended for more than three years only to resume in 2021. Investment management fees charged on the investments in FMP should be reimbursed to the policyholders, together with interest to compensate them for the loss due time value of money. FML should delist FMP and bring it back as a subsidiary of FML.”
The audit has also revealed an overstatement in capital guarantee charges aimed at safeguarding the initial investment amount from market downturns.
Capital guarantee fees are calculated monthly by applying a specific rate to the appropriate mean fund.
The main applicable rates over the investigation period were 2% for the Deposit Administration Fund and 3% for the Cash Accumulation Fund.
“The over statement of the capital guarantee fees of US$5 926 594 and ZW$202 815 955 over the United States dollar economy and the Zimdollar economy respectively should be paid back to the policyholders by the shareholder inclusive of all interest forgone by the policyholder.
“We noted that the asset portfolio that makes up the funds included the investment in FMP which was valued at Net Value with no writedown for impairment to the recoverable amount. Non-impairment of FMP increased the asset value that formed part of the asset base (mean fund value) used for computation of capital guarantee fees payable by policyholders to the shareholder,” reads the audit.
