₦airaland Forum

Below is a complaint I filed against AIICO on their financials sent to the SEC for the period ended 30-SEP-2018. I had initially wanted to let this pass but the anger in me for what I perceived that they are preparing for will not let me rest. I finally decided to file a complaint and make this post. I also sent a copy to AIICO's contact.

This is a follow up to my earlier complaint of accounting irregularities at AIICO plc on the company's financial statements issued for the period ended 31-DEC-2017. This complaint is on irregularities on the financial statement submitted to the SEC for the 9 months ended 30-SEP-2018. Though this complaint is primarily on the irregularities of the referenced financial statement, it is also intended to preempt what I consider to be the factor that motivates the management of AIICO PLC to commit the financial reporting irregularity in the first case.

First, a background.
AIICO PLC management indicated its intention to raise additional capital for the company about 2 years ago. Somewhere along the line, the management decided to raise the capital by private placement. In the course of 2018, the company issued a notice of an Extraordinary General Meeting to the shareholders. The sole agenda of the meeting was for the shareholders to approve the issuance of additional shares to an unnamed investor at =N=1.20 per share. My earlier complaint focused on the irregularities I saw on the financial statement for the period ended 31-Dec-2017 to the effect that AIICO understated the values of its government bond holdings and consequently, its equity capital by what I estimated to be about =N=12 billion. My contention then was that the management of AIICO did this in order to suppress the market price of the company's stock so they could share the intended private placement among themselves at a price that is much lower than the intrinsic value of the company. The financial statement for the period ended 30-Sep-2018 made me think that there is much more sinister motive at play. The motive I now perceive is that the management of AIICO not only want to ascribe more shares of the company to themselves, they do not intend to pay for the shares at the low price they advised. I believe they did this by creating fictitious liabilities on the balance sheet as of 30-SEP-2018 which they intend to convert to equity (share capital and share premium) at a later date.

Now, the Irregularities on the Financial Statements for the Period Ended 30-Sep-2018.

On the Financial Statements for the Period Ended 30-Sep-2018, I observed some items that are out of sync with each other. All figures are out of the financial statements submitted by AIICO to the Security and Exchange Commission for the referenced period.

1. When you compare the Financial Assets between 31st of DEC 2017 and 30-Sep-2018, there is a growth of =N=8.3 billion, from =N=73.6 billion to =N=81.9 billion. However, when you look at the Investment Activities section of the Consolidated Statement of Cashflow, the components of Financial Assets that featured there have Net Purchase of Treasury Bills and Equities of =N=0.5 and =N=0.9 billion respectively totalling =N=1.4 billion. Going by the position for Financial Assets as of 31-Dec-2017 and what the Consolidated Statement of Cashflow shows, the Financial Statement as of 30-Sep-2018 should show a balance of =N=75 billion. However, we see a balance of =N=81.9 billion. This discrepancy tells me that either of 2 things happened. (a) Because of my earlier protest pointing out the obvious understatement of the values of the government bonds help by AIICO , the management of AIICO decided to show the true value of their Financial Assets holding but instead of reflecting the enhanced value in the equity capital of the company, decided to reflect the offsetting credit in fictitious liabilities by overstating the values of one or more of the liability lines or (b) If the growth in the Financial Assets represent actual net purchase of the Financial Assets that is not fully reflected in the Consolidated Statement of Cashflow, then the entire financial statement put out by AIICO is totally unreliable because they have no control of their accounting system. I am inclined to believe that (a) more represents the situation.

2. The second obvious irregularity is indicated the ‘Group Statement of Changes in Equity’ for the Period Ended 30-Sep-2018. There is a Reclassification to Amortized Cost Assets of =N=1.026 billion, increasing the Group’s equity by the same amount. This is indeed a partial acknowledgement of the fact that the value of the Amortized cost assets was understated by that much as of 31-Dec-2017, vindicating the point of my earlier complaints. Imagine what this would have done to the price of AIICO if this was correctly reflected on the Financial statement as of 31-Dec-2017. More important though is the fact that if this is the only amount by which Amortized Cost Assets value was understated as of 31-Dec-2017, then the ‘Consolidated Statement of Cashflow’ for the Period Ended 30-Sep-2018 should have shown a total of =N=7.274 billion (=N=8.3 billion - =N=1.026 billion) for Net Purchase of Treasury Bills and Equities instead of a total of =N=1.4 billion we see for these 2 lines.
3. The ‘Consolidated and separate statement of profit and loss and other comprehensive income for the period ended 30-Sep-2018’ shows a negative (loss) of =N=3.088 billion in the ‘Net Fair Value Gains’ line. As explained in the Chairman’s Statement section of AIICO’s Annual Financial Statements and in the accounting policies, AIICO hedges its liabilities on Life and Annuity contracts by investing premiums received on those contracts in long term government bonds. The values of those government bonds vary according to prevailing interest rates. At the same time, the values of the life contracts they hedge also vary according to interest rates. When interest rates increases, the values of both go down in tandem and when interest rates reduces, the values of both increase in tandem. The impact of interest rates on the Government bonds is reflected as ‘Net Fair Value Gains or Loss’ while the impact on interest rates on the Life contracts is reflected in ‘Gross Premium Income’ which goes up when interest rates increases which causes the values of both Government Bonds and Life Contracts liabilities to reduce. The reverse happens when interest rates reduce.
The negative (loss) of =N=3.088 billion in the ‘Net Fair Value Gains’ line suggests that interest rates increased between31-Dec-2017 and 30-Sep-2018 to an extent that it reduced the values of AIICO’s holdings of Government bonds by that amount. This is highly improbable for the reasons I outline below:
(i) Considering my explanation in (1) above, if my contention in (a) that is partially supported by my point in (2) is what happened, then you cannot be re-stating the values of your Financial Assets upwards and still have a Fair Value Loss. If the possibility in (b) is what obtained, then we have to remember the basis of my earlier complained which contended that AIICO understated the values of its government bonds holding in its Financial Statement as of 31-Dec-2017 because they did not eliminate the negative charge to equity arising from the valuation of the government bonds at 16% in the Financial Statements for the Year ending 2016. We know that coupon rates on government bonds as of 30-Sep-2018 is between 13.5% and 14.5%. If your assets are held at rates higher than that, then there should be no Fair Value loss.
(ii) As I explained earlier, interest rates movements affect the value of both the Life Contract Liabilities and the hedging assets in tandem and we see the impact on different sections of the Profit and Loss Statement (ie Gross Premium Income for Liabilities and Net Fair Value Gain/(Loss) for financial assets. We see a =N=3.088 billion loss in the ‘Net Fair Value Gains’ line without any corresponding impact on the ‘Gross Premium Income’ line. Usually, when there is interest rate increase causing the value of the contract liabilities to reduce, the ‘Gross Premium Income’ is more than the ‘Gross Premium Written’ in that period. In the Profit and Loss for the Period Ended 30-Sep-2018 however, the ‘Gross Written’ is more than the ‘Gross Premium Income’ by =N=1.747 billion which is even more than the =N=1.08 billion increase in None Life Unearned Income Liability (another part of the business that affect this line). This means that the implied increase in interest rates that reduced the value of Government Bonds causing a charge of =N=3.088 billion to the Profit and Loss account did not have any impact on the value of life contract liabilities that the assets hedged.
4. This concerns the Non Life business segment of AIICO. I have to say upfront here that though this indicates to me a possible inclusion of fictitious liability that AIICO is showing in its financial statement as of 30-Sep-2018, I only got this notion by comparing that business segment with AIICO's peer in the segment. In this case, NEM, a Non Life Insurance Company. As at 30-Sep-2018, NEM has a Total Insurance Contract Liability of =N=7 billion on Gross Premium written for the year of =N=12.5 billion, a 56%. AIICO on the other hand has a Total Insurance Contract Liability of =N=8.9 billion on Gross Premium written of =N=8.4 billion on the same business line, a 106%. Both AIICO and NEM operate in the same market.

locodemy:
why do you think the mgt want to surpress the share price and to whose detriment?

The reason is because management want to make the proposed private placement to themselves on the cheap. It is the retail shareholders who have no way of participating in the private placement that will lose because their holdings will be diluted. I foresee the management shunning out much more healthy financials once the private placement is concluded but they would have increased their own holdings.

MonkeyHunter:
Leadway's financials can be downloaded from here

https://www.leadway.com/about-leadway-assurance/annual-accounts/

Regards

Thank you very much. It is just what I anticipated. Read this portion of the chairman's statement from another life insurance company

Quote

The Group recorded a 60% increase in Gross
Premium Written (GPW) from N52.7billion in 2016
to N84.2billion in 2017. This increase in GPW is
largely attributable to the significant growth of our annuity business and positive impact of the decrease in average yields of treasury securities which resulted in significant fair value gains and investment income in our portfolio of treasury assets

Unquote.

Aiico had the same fair value gain, which is really a reversal of prior year mark down, on it's treasury assets but chose not to reflect it in the values of the treasury assets. The motive, as I have said is to suppress the market value of the share price so that management can share the private placements among themselves on the cheap. I do not understand why the regulators are not seeing this obvious maneuver. Because of what I am seeing on the 2018 quarterlies that have been released, I even suspect an intent of not paying for the private placement at all.

locodemy:
unless the private placement is discarded.Aiico will go up in price likewise Diamond bank.

Note......I am not buying Aiico because of result but because of the new investor who is bidding above the market price.

Aiico management continues to manipulate it's financials to suppress it's share price because of this private placement they want to do. They want to buy more shares of the company on the cheap. The q3 financials has an unexplained N3.6 billion Fair Value loss. We know that losses like this come from the valuation of their government Bond holdings when interest rate increases. However, there has not been any significant movement in government Bond coupon rates between December 2017 and end of September to justify this loss. Besides, we did not see any correspondent downward movement on the life contract liability side if interest rates has gone up This is another one on top of their undervaluation of their government Bond holdings as of 31 Dec 2017. For the financial year ending 31 Dec 2016, AIICO correctly marked down the value of it's Government bond holdings by N12 billion because interest rates on government Bond jumped. The life contract liabilities were similarly marked down. By financial year ending 31 Dec 2017 however, interest rates on government bonds reverted back to around 13%. While the life contract liabilities were correctly marked up to reflect higher valuation because of lower discounting rates, the value of the government bonds assets were not marked up to reflect the lower prevailing rates. Instead, the N12 billion negative reserve created in 31 Dec 2016 because of the asset mark down was netted against the Retained Earnings post 31 Dec 2017. If one takes out all of these manipulations through the valuation of assets and liabilities because of changes in interest rates, then you begin to see the true potential of AIICO. Sometimes, I wish I could see the financials of Leadway, the leading life insurance company to compare with AIICO but Leadway is a private company.

currentprice:
Mpeace what is the offer says now

If you want to join me in this fight against the AIICO Private Placement, please email me at Modupe@Comcast.net. There is so much corruption going on in Nigeria's corporate governance. Retail investors should not just roll over. I have already filed a complaint against the company with the SEC but we need to attack the EGM itself.

Coolcash1:
Concerning AIICO private placement, as an investor, why would I want to pay higher for the company shares when I can get it cheaper on the floor of the NSE?? The price is suppose to be at discount to the current market price except power is about to change hands in the company....

They cannot bring a demand for 4.4 billion shares to the market for a company that has only 6.9 billion shares with more than 50 percent in the hands of core owners. The price will shoot through the roof.

Dupeodus:
My post here is to launch a protest about what I consider a daylight robbery of retail investors of AIICO by AIICO's Management. AIICO announced that it will be doing a private placement of 4.4 billion shares to an undisclosed investor by private placement at N1.20 per shares and is planning an extra ordinary shareholders meeting to seek shareholders approval. Please do not be carried away by this proposed price of N1.20 compared to the market price. This is because I believe that AIICO's management has been manipulating its financial statement in the last 3 years to suppress the market price of AIICO's shares in anticipation of this private placement. First, the book value of the equity of AIICO as at 31-DEC-2017 works at about N1.58 per share. More importantly though is the fact that AIICO has about N12 billion hidden assets in the undervaluation of Federal Government bonds it holds as at that date. This N12 billion was shown as a negative reserve of the AFS assets in the equity section. Think about it. This is FGN bonds which is raw liquidity. Let me explain how I came about this.

In the 2016 financials, AIICO marked down the value of its treasury bills holding by about that N12 billion naira because they claimed interest rates increased and the face value of the FGN bonds has to be discounted. They disclosed the list of FGN holdings and over 90% of them by value were at about 12.15%. I can only guess that they used a prevailing 16% or thereabout interest rates for discounting because the list of many FGN bonds in the 2017 Financial statement was at 16% - 17%. This was fair enough as in that same year, the value of liabilities for life insurance and annuities were marked down for the same reason.

However, in the 2017 financial statement, the value of of liabilities for life insurance and annuities were now marked up by about N11 billion naira depressing the profit for the year. According to the Chairman's statement, this was because interest rates reduced by 12.9%. I believe this was a mistake in that he meant interest rates reduced to 12.9 percent which is used to measure the liabilities for life and annuity contracts. You will expect the same 12.9% to be used to measure the carrying values of the FGN bonds which should wipe off the N12 billion negative AFS reserves and show that the FGN bonds are being carried at cost. Alas, the N12 billion negative equities are still in the books. As I said earlier, as at 31-DEC-2017, about 80% by value of the FGN Bond holdings of AIICO were at 12.15% while the rest were at greater than 16%. At prevailing interest rates of 12.9% according to the Chairman's statements, these bonds should be carried at cost at least because the positive margin of about 3% on the 20% of bonds carried at 16% should be enough to offset the negative margin of 0.75% on the majority of the bonds. Therefore, instead of the value of N71.5 billion at which the Available for sale assets are carried in the books, it should have been at about N83.5 billion. Consequently, shareholders funds should have been at about N22.5 billion or about N3.25 per share instead of the N10.5 billion or N1.58 per share shown in the books.

The sole purpose of this private placement is for the management of AIICO to grab the company at the expense of retail shareholders. This is a very highly capitalized company with super liquidity. The company has about N83.5 billion FGN bonds at face value and N5 billion of Cash and Cash Equivalents to service N70 billions of Insurance and Investments contract liabilities. AIICO does not need the proceeds of this private placement.

I plan to write a letter of protest to both NAICOM and the SEC on this issue. If you can, please join this fight.

I just looked into the AIICO H1 2018 and realized that the shenanigans continues. First, about N10 billions of the AFS negative reserve have been charged against the Retained Earnings leaving only N2 billion, making the undervaluation of FGN Bond holdings less transparent. Secondly, there is a jump of N6.7 billions in Insurance Contract Liabilities. There are two issues I see with this. First, has interest rates of gone down so much within 6 months to warrant such a significant mark up in liabilities? Secondly, when you see this markup on this line, it is usually against the Gross Premium Written creating a negative gap between the Gross Premium Written and Gross Premium Income. However, the negative gap between the Gross Premium Written and Gross Premium Income in this statement is only N2.3 billions. I do see an increase of N4.9 billion in claims expenses btw half years 2017 and 2018

I firmly believe that this statement is cooked to the negative with the sole purpose of suppressing the market price of the shares so that these guys can buy the company on the cheap through the Private Placement.

My post here is to launch a protest about what I consider a daylight robbery of retail investors of AIICO by AIICO's Management. AIICO announced that it will be doing a private placement of 4.4 billion shares to an undisclosed investor by private placement at N1.20 per shares and is planning an extra ordinary shareholders meeting to seek shareholders approval. Please do not be carried away by this proposed price of N1.20 compared to the market price. This is because I believe that AIICO's management has been manipulating its financial statement in the last 3 years to suppress the market price of AIICO's shares in anticipation of this private placement. First, the book value of the equity of AIICO as at 31-DEC-2017 works at about N1.58 per share. More importantly though is the fact that AIICO has about N12 billion hidden assets in the undervaluation of Federal Government bonds it holds as at that date. This N12 billion was shown as a negative reserve of the AFS assets in the equity section. Think about it. This is FGN bonds which is raw liquidity. Let me explain how I came about this.

In the 2016 financials, AIICO marked down the value of its treasury bills holding by about that N12 billion naira because they claimed interest rates increased and the face value of the FGN bonds has to be discounted. They disclosed the list of FGN holdings and over 90% of them by value were at about 12.15%. I can only guess that they used a prevailing 16% or thereabout interest rates for discounting because the list of many FGN bonds in the 2017 Financial statement was at 16% - 17%. This was fair enough as in that same year, the value of liabilities for life insurance and annuities were marked down for the same reason.

However, in the 2017 financial statement, the value of of liabilities for life insurance and annuities were now marked up by about N11 billion naira depressing the profit for the year. According to the Chairman's statement, this was because interest rates reduced by 12.9%. I believe this was a mistake in that he meant interest rates reduced to 12.9 percent which is used to measure the liabilities for life and annuity contracts. You will expect the same 12.9% to be used to measure the carrying values of the FGN bonds which should wipe off the N12 billion negative AFS reserves and show that the FGN bonds are being carried at cost. Alas, the N12 billion negative equities are still in the books. As I said earlier, as at 31-DEC-2017, about 80% by value of the FGN Bond holdings of AIICO were at 12.15% while the rest were at greater than 16%. At prevailing interest rates of 12.9% according to the Chairman's statements, these bonds should be carried at cost at least because the positive margin of about 3% on the 20% of bonds carried at 16% should be enough to offset the negative margin of 0.75% on the majority of the bonds. Therefore, instead of the value of N71.5 billion at which the Available for sale assets are carried in the books, it should have been at about N83.5 billion. Consequently, shareholders funds should have been at about N22.5 billion or about N3.25 per share instead of the N10.5 billion or N1.58 per share shown in the books.

The sole purpose of this private placement is for the management of AIICO to grab the company at the expense of retail shareholders. This is a very highly capitalized company with super liquidity. The company has about N83.5 billion FGN bonds at face value and N5 billion of Cash and Cash Equivalents to service N70 billions of Insurance and Investments contract liabilities. AIICO does not need the proceeds of this private placement.

I plan to write a letter of protest to both NAICOM and the SEC on this issue. If you can, please join this fight.