The shares of the embattled Freedom Insurance Group Ltd (ASX: FIG) will be on watch on Wednesday when they return from a trading halt.
The struggling insurance seller requested the trading halt this morning whilst it prepared an announcement regarding the outcome of its strategic review.
For those that are unaware, the Freedom board and Deloitte have been undertaking a review of the company's strategy, business structure, and operating model. The review aimed to protect and maximise shareholder value, in particular future revenue from trail commissions represented by the value of the company's trail asset.
Management advised that the strategic review considered options to transition the business model to comply with ASIC recommendations following its recent review into the direct life insurance industry.
But the major issue for the company was that its upfront commission revenue is largely derived from the sale of final expenses insurance and the existing distribution model would not meet ASIC's proposed new regulatory regime.
Based on detailed analysis, the board has decided to implement a restructuring of the business. This will result in the immediate suspension of new business sales of all direct insurance products, though it will continue to service and renew its in force book of policies.
Due to the reduced activities, the company will reduce its staff to approximately 90 employees and will decrease other operating costs to align them with the reduced activities. As a comparison, in August the company reported that it had 229 employees on a full-time equivalent basis.
Two staff members that are on the way out are its CEO and CFO. According to the release, Keith Cohen will depart as managing director and CEO immediately, while CFO Jenny Andrews "intends to depart the company".
Current COO, Craig Orton, has been appointed the new CEO of the company.
What are the benefits of the restructure?
The release advises that upon implementation, these initiatives are expected to reduce annual operating expenses by at least $15 million. To get there the company will incur approximately $4.8 million of restructuring costs, inclusive of redundancy payments for affected staff.
While the company won't be generating new sales until a new business model that results in a resumption of sales can be found, Freedom will continue to receive administration fees and trailing commissions from its existing in force policies.
As at June 30, the net present value of commissions from its in force polices was valued at $74 million, partly offset by a provision for clawback of commissions of $16.3 million. Though, given what was heard during the Royal Commission, I would not be surprised if a decent portion of these policies were cancelled over the next 12 months.
Finally, the board finished by stating that it "unanimously believes that, in light of the significant in light of the significant impacts on the business arising from the recent ASIC review of the direct life insurance market and anticipated changes to the regulatory environment, the business restructure announced today is in the best interests of Freedom shareholders, business partners and policy holders."
What now?
Things certainly do not look good for Freedom after this review. I suspect that a recapitalisation a la Slater & Gordon Limited (ASX: SGH) might be in order in the near future to keep it afloat.
In light of this, I would urge investors to give Freedom a wide berth and watch on from the safety of the sidelines instead.
