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MADISON, Wis. – At CUNA Mutual, 2005 might best be remembered for its problems with its union.or maybe the challenge it faced with the hurricanes.or possibly the flood of plastic card losses it had to contend with. None of those are positive developments, but they didn’t derail the company financially either – its year-end numbers prove that. CUNA Mutual’s revenue grew by 9.5% to $2.64 billion last year, its strongest showing since 2000. CUNA Mutual CFO Jeff Holley cited exceptional growth in the company’s international business, specifically Canada and Australia, as well as increased sales of lifetime payout annuities from its Retire With Confidence program. The retirement program generated $50 million in additional revenues. It is sold through its Member Financial Services representatives, and tries to match the flows of income for a retiree with their fixed expenses. The company focused on generating more credit insurance sales by helping credit unions cross-sell credit insurance products. “When they’re making loans, the credit union up-sells or cross-sells credit insurance, GAAP, mechanical repair coverage. We have a heavy training program for that,” said Holley. This area produced $30 million in additional revenue last year. Its international business was particularly strong in Canada and Australia, but its venture into China has produced little revenue so far. It entered China in 2004 with high hopes. “Very little business has actually come on the books at this point,” said Holley. Profits were up from $127 million in 2004 to $131 million in 2005, a modest increase, but still a record. Holley said if it wasn’t for the $20 million in hurricane losses and the $65 million in plastic card losses that hit the 2005 financial statement, 2005 would have been even higher. (The $65 million number includes some claims from 2004 that didn’t hit until the 2005 financial statement. 2005 contract losses were $44.5 million). The alarms have been sounding at CUNA Mutual over plastic card losses for some time. “It’s interesting. We knew it was an issue last year and thought we could corral it by focusing on those credit unions with the largest losses. But a large number that had no losses, all of a sudden started getting hit,” said Holley. CUNA Mutual has commissioned a task force of its best and brightest to fight the problem and recently issued a best practices document on the issue. (See related story page 21.) Holley said CUNA Mutual wants to continue to protect credit unions’ plastic card programs, but the reality is if losses continue to be high, it could have to stop. “If it proves to be a runaway train, then we’re going to have to get out. Our focus is to work with processors, work with credit unions and get the risk management elements in place to continue to provide this coverage.” To put the catastrophic losses from the hurricanes in perspective, over the company’s 30-year history it’s only had $25 million in losses related to catastrophes. The lion’s share of claims surrounding the hurricane were for property loss, though there were also credit insurance claims, disability losses, and other coverages being called on to help victims, both on an institutional and personal level. CUNA Mutual sold its mortgage operation last year that saw approximately 170 employees leave the company. It announced other back-office layoffs last year that it believes will save the company $14 million in 2006. However, it ended 2005 with approximately the same number of employees (approximately 5,500) it started the year with as it acquired 154 employees by buying out Appro’s 46% stake in the Loanlink Center, and 15 employees through the acquisition of an equipment maintenance insurance company, Systems Insurance of America. Just last week, CUNA Mutual announced that 55 positions would be eliminated as part of restructuring of its Training & Development business unit, however it would be creating 43 new positions, resulting in the net reduction of 12 positions. It’s been well-publicized that CUNA Mutual is cutting staff. It has announced approximately 550 job cuts to date. Holley noted though that there are a number of costs associated with laying off employees, including severance packages, that limit the financial benefits at least in the short-term. Operating expenses came in slightly higher than expected at $1.07 billion, with $1.01 budgeted. But Holley said this is actually a positive number as the increase is mainly the result of greater revenues. “With more business, there’s more expense, more commissions, policy issuance expenses,” said Holley. Return on Equity was 9.1%, falling short of its 9.7% target, again a result of more expenses related to higher revenue. CUNA Mutual CEO Jeff Post has wanted to raise the company’s ROE from day one, and bring it more in line with other insurance firms. Holley said that it hopes to reach 10.1% ROE next year, but he noted that since CUNA Mutual is so unique, it is hard to compare it to the 12-15% range of ROE at other insurers. On the ratings front, both A.M. Best and Fitch recently reaffirmed their ratings. Best rates CUNA Mutual’s primary insurance companies as A and Fitch as AA-. CUNA Mutual is in a re-engineering mode. It is looking at product administration, processing, and claims. It is reorganizing and reorienting the sales force under Bob Trunzo’s direction and is trying to consolidate its 35 call centers into a smaller number that provider a more consistent customer experience, said Holley. Post has been working to strengthen the management team. His most recent move was bringing in David Marks as chief investment officer. Marks hails from Citigroup Insurance Investments and has deep contacts on Wall St. Holley said CUNA Mutual expects to bring in at least $22 million more off its portfolio next year. It made $385 million last year. “2006 will continue to be a year of investment, and continue to be a year of change at CUNA Mutual,” said Holley. [email protected]

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