Shares in the struggling Freedom Insurance Group’s fell out of bed yesterday after the company warned it could be facing a probe from regulators, liquidity strain in 2019 and a multi-million dollar customer remediation bill.
The life insurance distributor saw its shares plunge more than 47% yesterday to take the loss so far in 2018 to more than 90%. They ended a day of violent trading at 2.9 cents.
That values the company at just over $8 million, meaning that with the prospect of an expected $8 million loss and the customer remediation bill of $3 to $4 million it could see its value wiped if there is not a rebound in the value of the shares soon, or a major new shareholder or source of finance found.
The future of Freedom’s cold calling business model for selling insurance is uncertain in the wake of stepped-up regulatory scrutiny of the direct life insurance sector.
That follows disclosures at the banking and finance royal commission about the company’s cold calling and direct selling practices and handling customer complaints. Freedom was hammered earlier this year in a grueling examination at the inquiry.
That saw the shares slump then and the company’s future question. It responded by commissioning a review by Deloitte’s, the results of which were released yesterday, along with the news of a possible probe by ASIC and the liquidity concerns.
Since October, freedom has lost two chief executives, a chairman, and a chief financial officer, halved staff numbers and suspended new sales of direct insurance products.
A statement on Thursday saw reveal that a strategic review undertaken with Deloitte had found there was no “immediate commercially viable option” to restart sales of its life products.
As part of the review, it identified that on a “business-as-usual” basis, it might face a liquidity shortfall in next year (i.e. too much money going out and not enough coming in.
As part of the review, the Board identified that, on a business-as-usual basis and in the absence of any responsive action, the company may face a liquidity shortfall during the calendar year 2019 arising from the timing of payments of commission clawbacks in the absence of receipts of commissions from new business sales.
“In this regard, the company is considering alternate options to address the potential shortfall. In addition, Freedom is implementing initiatives to improve operational efficiency and reduce costs,” Freedom said in the ASX statement.
Despite these concerns, the company remains confident it can sus=rvive, telling the ASX yesterday that “Notwithstanding this potential liquidity issue, the board remains satisfied that the company is solvent, based on the funding, efficiency and business restructuring options available,” it said in a statement.
Freedom said that after talks with the Australian Securities and Investments Commission (ASIC), which is investigating past misconduct that was highlighted during the royal commission, the company needed to make remediation payments to affected customers.
It was currently conducting a detailed review of its records and accounts to determine the size and scope of the remediation but based on an early analysis, net remediation costs of between $3 million and $4 million may have to be set aside in its December 31 half year accounts.
Freedom had previously forecast a loss of up to $8 million for the six months to December 31, including restructuring costs. That could now reach $12 million or more and more than the company’s market value.