| This story was taken from www.inq7.net
MIKE Kelly Villaflor, 17, a second year fine arts student at the University of Santo Tomas, should be home studying for his exams. Instead, he is one of the thousands of exasperated students and parents besieging the offices of the College Assurance Plan Philippines Inc. (CAP) in Multiply this story many times over, with variations: the father who stopped working abroad after the premium payments to the CAP educational plan for his two kids were fully paid; the housewife who needs to pay off the loan shark from whom she advanced the tuition of her three kids pending reimbursement from CAP. CAP is the second largest pre-need company in the country and has funded the education of 37,421 planholders since 1980. But its future as a company is now in shambles. And so is the promise to fulfill the dream of a college education of the planholders who have fully paid or are still actively paying their plans. Total planholders is at 780,603--dwarfing the number of all other previous victims of failed investment instruments. This is a story of how the company shareholders, professional managers, and regulators have failed to defuse a time bomb long waiting to explode. A high-ranking official from the Securities and Exchange Commission (SEC) said that planholders and the beneficiaries would have to accept a fraction of the benefits they had been promised by CAP. CAP: Market Leader Sobrepeña’s “invention”—the traditional educational plan, where the pre-need company guarantees full payment of tuition at the time of maturity—has been copied by many pre-need companies. Filipino parents quickly snapped up the educational plans and money rolled in for CAP, which became the number one educational plan provider in the country. Since 1981, CAP’s board of directors has been chaired by politicians such as former Senator Manuel P. Manahan (1980-1994), former President Diosdado P. Macapagal (father of President Arroyo, 1995-1996), former Senator Raul S. Manglapus (1996-1999), and former Education Secretary Alejandro R. Roces (2000-2004). CAP was banking on the country’s economic growth, as well as former President Marcos’s tight regulation of fees of colleges and universities. Every year, college fees would go up by only 10 to 15 percent. However, the pre-need industry did not foresee the deregulation of fees in 1992. Just before the Asian financial crisis, from 1990 to 1995, tuition jumped a whopping 275 percent. And for 1996 to 2000, the price of education went up by another 26 percent. CAP’s revenues generated from collections of planholders were no longer enough to meet the increasing costs of tuition and the higher number of maturing plans. For instance, CAP said that fees at the Ateneo de Manila stood at P9,200 in 1990, but swelled to P37,000 per semester in 2000. In response, other firms offering educational plans adjusted their products and offered fixed value plans, or those that have a pre-determined value come maturity time. Yet, CAP continued to offer traditional educational plans for 10 more years, or up to 2002. Industry players say the Sobrepeñas, well-regarded as consummate marketing people, saw the 10 years as an opportunity to sell more plans, and thus positioned themselves as the best alternative among all other educational plans. They strengthened their position as the market leader in the educational plan business. From 1980 to 2003, CAP had a total of 780,603 apart from 37,421 planholders fully served by CAP. About 81,029 are currently being served. More importantly, 382,483 planholders are fully paid but had not yet availed themselves of their benefits as of end-2003. These plans will mature in the next few years. However, there are still 164,000 planholders who are actively paying their plans. Ninety-one percent of these existing planholders are holding on to traditional plans. CAP ignored the 2002 rules for the pre-need industry that SEC instituted to avoid these kinds of problems. At the core of the contention is the deficiency in the trust fund, which is the difference between the actual trust fund and actuarial reserve liability (ARL). The ARL is computed on the basis of assumptions on interest rates, inflation rates, and percentage of lapsed plans or contracts cancelled due to incomplete payment and, in the case of educational plans, tuition increases. An ARL arises when there is a gap between the actual and actuarian’s projected portion of the premium payments set aside by CAP so that trustee banks which manage it can invest and grow it until it is enough to meet the cost of tuition when the beneficiary of the plan goes to college. Usually, the planholder makes the premium payments for about five years, then waits for another five or more years until the plan matures. In effect, SEC was saying that, even before 2002, there were not enough buffer funds in CAP’s trust fund to cover the future requirements of its existing planholders. In 2002, the deficiency in the trust fund was only P2.5 billion. By 2003, the deficiency had leapfrogged to P17.2 billion. Independent actuarians, however, calculate the deficiency then to have stood at P25.7 billion. Angry Planholders Since the start of the 2004-2005 school year, CAP has been having a hard time settling the tuition of its planholders with its 227 accredited schools. Eventually, Ateneo de Manila and As its financial woes pile up, CAP is scrambling to find funds to serve its planholders. It has been turning to its sister companies for cash advances and loans. Last October, CAP sold a portion of its Metro Rail Transit (MRT) bonds. Due to increasing pressure from angry planholders and after the prodding of several congressmen, the SEC had to approve the proposal of CAP to withdraw P110 million in cash and cash equivalents from its trustee bank Philippine Veterans Bank. The bank was supposed to release the funds in tranches and replace it with MRT bonds, as CAP’s need for funds arose. However, the first tranche of P20 million was withdrawn by planholders and schools in just two days. CAP has resorted to using the collections or the installment payments of the existing planholders, and the premiums of the newly recruited ones, to pay the tuition of the current enrollees. The SEC, in a rare exercise against a pre-need firm, decided not to grant CAP its certificate of license to sell P1 billion of new securities. CAP’s license expired in September 2004 but it reached the limit of its P5-billion license as early as June. In defiance of SEC orders to stop selling new plans, CAP was still found to have sold P8.02 million worth of plans in August. With the reduced cash inflows, CAP had to resort to going after the P110 million that SEC has already insulated from the trust fund of the traditional plans. CAP, through its trustee banks, was able to generate returns from trust fund investments. CAP’s trust fund, however, performed miserably. For the past three years, 2001 to 2003, and the nine months of 2004, CAP’s trust fund assets only earned yields totaling 3.06 percent (4.95 percent, 3.10 percent, 1.10 percent and 2.53 percent, respectively.) These were way below the more than 200 percent increase in tuition, and even the assumptions of CAP’s own actuary that rates will average 12 percent for the same period. As of Oct. 31, 2003, CAP had only P8.95 billion in trust funds managed by its trustee banks versus ARL of P25.6 billion. The trust fund deficit problem was aggravated by the inadequate deposits to the trust fund, the dismal earnings of trust fund assets, and the overvaluation of certain assets in the trust fund. The Trustee Banks Senate investigations and SEC reports showed that the trust fund was often at the behest of CAP, although the trustee banks were supposed to manage the funds independently. Take the case of BOC, where CAP’s trust fund accounts for up to two-thirds of the entire trust bank’s portfolio. At a Senate hearing, Enrique Sobrepeña admitted that the dealings between CAP and BOC were not exactly at arm’s length. According to BOC officials, however, the trust fund was managed in a “sound and prudent manner.” The trust fund includes P3.26 billion of MRT bonds, P2.74 billion worth of real estate, P2.25 billion worth of stocks, P526.59 million in fixed income placements, and P161.56 million in receivables. However, around 65.5 percent of the trust funds assets or P5.86 billion have been invested in companies under its sister firm, the Fil-Estate Group. The biggest chunk is the MRT bond, which represents 36.48 percent of the trust fund assets. Enrique Sobrepeña’s son, Robert John, is at the helm of the Fil-Estate group. This sister company has assets that include properties in Nasugbu, condominium units at Renaissance 3000, a P1.2-billion property in Laurel, Batangas, as well as CAP offices and land for future office use. Total equities investments in Fil-Estate companies stood at P885.82 million, including stocks in Fil-Estate Corp., Fil-Estate Management, Camp John Hay Development Co., Fil-Estate Ecocentrum, Nasugbu Properties, MRT Development Corp., Because the trust fund is heavily skewed in favor of related companies, which deal in real estate, CAP has had liquidity problems. The schools needed to be paid in cash. It did not help that most of the Fil-Estate stocks fell in value. For instance, the shares in Fil-Estate Management now have a market value of P641.03 million, a 57 percent drop from the acquisition cost of P1.5 billion. There have been no published transactions regarding a consummated sale of these assets. The Regulator The CAP’s financial statements, audited by San Buenaventura and Co. and submitted to the SEC, gave few clues to the magnitude of the company’s problems. CAP continued to report profits up to the late 1990s. It reported a net loss of P1.45 billion only in 2001 when it restated its earlier financial statement which showed a net income of P226.52 million for 2001. When Constantino Guadalquiver Mendoza & Co. audited CAP’s 2003 financial statements, the company was shown to have been suffering recurring losses from operations amounting to P2.8 billion as of end-2003 and P403.3 million as of end-2002. In 2002, a group of actuarians reported to the SEC that CAP was “largely insolvent with a negative net worth of up to P15.4 billion.” In other words, CAP was bankrupt. CAP saw its losses balloon to P2.58 billion for the first nine months of 2004. CAP reported a net loss of around P900 million in the third quarter alone, growing 53 percent from the net loss of P1.68 billion incurred from January to June last year. The losses could be partly traced to CAP’s failure to generate enough revenues to meet the maturing obligations of its planholders, as well as its inability to sell new pre-need plans to the public, after its dealer’s license was suspended by the SEC. CAP’s total revenues stood at P961.79 million, but its operating expenses continued to swell to P3.54 billion as of end-September. In 2003, SEC created an oversight board and appointed a comptroller to closely monitor CAP’s progress. The oversight board was composed of SEC general accountant Roberto G. Manabat, SEC NIS director Emilio B. Aquino, and comptroller Mario M. Aguas. In its report to the commission dated May 13, 2004, the SEC oversight board noted that the financial status of CAP could be worse than what they were being told. For example, it found significant unreported amounts of ARL due to the understatement of number of plans used to compute the ARL in 2001 and prior years, and to the unrealistically high yield rates used in ARL computations. For instance, CAP reported an additional 132,069 fully paid plans in 2002; this was questioned by the SEC, which found that the number of fully paid plans in 2002 was only 44,441 and the rest were unaccounted for. The understatement was valued at P7.5 billion. Thus, it was in 2003 when CAP’s trust fund shortfall swelled, mainly because of the underreporting of its ARL in the past years. The oversight board said CAP management violated good governance principles: “The institutions which ordinarily were expected to provide basic controls in a corporation were effectively compromised or ‘neutralized.’ These are the board of directors, principal bank trustee, actuary and external auditor, who were compromised when they got into ‘conflict of interest’ situations.” The oversight board also asked the SEC compliance and enforcement department to conduct an investigation into the serious infractions committed by company officials and professionals. CAP’s actuary, Odette F. Solis, who had understated the ARL from 1986 to 2001, migrated to With these findings, the oversight board recommended the immediate appointment of a receiver or management committee to undertake management of CAP and control all existing assets and properties of CAP and its trust fund. Despite the strong case made by the oversight board for CAP to be placed under receivership, the commission, headed by then chairperson Lilia Bautista, did not approve the recommendation. The commission believed that in the interim, CAP could be saved through the sale of MRT bonds, its most liquid asset in the trust fund. This prompted the oversight committee to submit its irrevocable resignation last June 9. The SEC named former SEC commissioner Danilo Concepcion chairman of the new oversight board, but he declined to accept the post. The board also included SEC assistant director Nonilonia Ambat as comptroller and lawyer Carlo Taparan, but they resigned last September. The Roadmap However, the SEC officials scoffed at CAP’s claims of a surplus, saying the trust fund road map would even show a shortfall of P10.19 billion based on present values. An SEC source noted CAP’s proposed adjustments in the valuation of properties are not based on current market values, but future projected values of the developed property: “Right now, many of the properties are not developed, so how can you include the future value of the property? Where will CAP get the funds to develop the properties?” The second oversight committee submitted a terminal report on CAP to then-newly appointed SEC chairperson Fe B. Barin last September 30, supporting the findings of the previous oversight board: “It is reiterated that for continuously failing to comply with all the SEC requirements regarding its liquidity, insolvency, capital impairment, trust fund settlement and to prove it has the ability to deliver its guaranteed services/contractual obligations to its planholders, and in view of the total defiance of recent SEC orders on the suspension of its dealer’s license and stop selling new plans, the company and its losing affiliates should be immediately liquidated.” However, Barin said the Commission is giving CAP time to address its financial problems, since it would be the planholders and the thousands of students who would suffer the most. More than two years after CAP’s problems were made public, the SEC and CAP have yet to find a solution. CAP is trying to find a new investor to bring in fresh equity and loans. However, SEC officials are skeptical, especially since CAP has been promising to bring in new investors since 2002. In 2004, CAP has been claiming interested investors from Hong Kong and the Even CAP’s deal with businessman Romeo Roxas to infuse a 3,000-hectare, P6-billion property located in Quezon province into the trust fund has yet to receive SEC’s approval. SEC officials have raised questions about the P6-billion property, since parts of it in Dingalan, Aurora, have been earmarked for the agrarian reform program. This is part of the property-share swap agreement between CAP and the two Roxas companies, Green Circle Properties and Resources and Green Square Properties Corp. Talk among the industry players is that no investor will touch CAP while the Sobrepeñas are there. Realistically, an SEC official said, the planholders will have to accept that the value of the benefits they paid for will be less than expected—or none at all. Send us your feedback: letters@newsbreak.com.ph |
©2005 www.inq7.net all rights reserved
No comments:
Post a Comment