MADISON, Wis. — CUNA Mutual CEO Jeff Post continues to be a change agent for the $17 billion credit union insurer and financial services provider. He is no longer the new guy and credit unions are finally getting to see if Post is living up to his words.

CUNA Mutual is in the midst of a three-year transformation plan to turn the company into an efficient operation that can do more for credit unions and thus help the industry grow. This plan has been the hallmark of Post's short two-year tenure.

While the three-year plan is just starting year two, it is already showing some bottom line benefits. CUNA Mutual's 2006 profits increased 36% to $47 million on total revenue of $2.894 billion. Return on equity came in at 11.4%, that's approximately 1% in terms of return on assets, mirroring what the credit union industry has experienced, up from .8% last year.

The company gave back $1.4 billion to credit unions, the biggest chunks coming in loan repayments ($448 million) and life, disability, property and casualty claims ($548 million). It also paid out $186 million in fee income to credit unions at a time when credit unions are looking high and low for new sources of noninterest income.

CUNA Mutual's bottom line benefited on three primary fronts on the expense side: a $9 million savings related to the reduction in staff from 4,900 to 4,100; $11 million in tax benefits, with half coming from a dividend from Private Mortgage Insurance; and most significantly a $42 million increase in net income from its investment portfolio. It netted a 20.92% return on its equity portfolio, beating the S&P 500 by over 500 basis points.

It also benefited from what didn't happen. 2005 saw major hurricanes resulting in $12 million in losses related to catastrophic events, while 2006 didn't have any catastrophic events that affected CUNA Mutual.

Looming for the company is a possible merger of CUNA Mutual Life Insurance Company in Waverly, Iowa and CUNA Mutual Insurance Society in Madison, Wis. This is expected to result in a $12 million one-time tax benefit, and a few million dollars in savings annually going forward. The deal needs shareholder approval and would also call for a change of domicile from Wisconsin to Iowa for the merged company.

Post often says that a strong CUNA Mutual benefits all credit unions, and he hopes credit unions understand that it's not just about profits. “At the end of the day we need to make money so we can support our growth and credit unions' growth,” he said. He noted that profitability affects CUNA Mutual's ratings. AM Best has the company currently rated an A and Fitch has it pegged as AA-. Both are solid ratings, but they could be better.

“When a credit union is out selling one of our annuities, their members are shopping places other than the credit union. One thing they're going to look at is the ratings. If the financial ratings get weaker, products get weaker. We want to maintain our ratings and go up a notch,” said Post.

He said rating agencies keep pushing the profitability bar up, so CUNA Mutual must keep pace.

Post is most excited about the company's investment performance last year, and he doesn't think it's a flash in the pan. “I'm confident in who we have here. Our average duration on our assets is about three-and-a-half years. Most of our investments are fixed income. We should be able to carry that through into subsequent years, taking new cash and keeping the ball moving forward,” said Post.

He credits the turnaround on the investment side to Chief Investment Officer David Marks. Marks and Post are long-time friends and colleagues from Post's days leading Fireman's Fund. Marks managed CUNA Mutual's equity portfolio into the upper echelon in 2006. Only 19% of all actively managed equity portfolios beat the S&P last year.

The investment improvements aren't only on CUNA Mutual's portfolio. Its MEMBERS Mutual Funds/Ultra Series Funds Equity Portfolios also had strong years. Its mid cap value fund was in the 38th percentile in '06, compared to the 55th in '05; the large cap fund was in the 38th compared to the 89th; and the large cap value was in the 22nd compared to the 91st.

2006 wasn't all positive for CUNA Mutual. Plastic card losses increased from $89 million to $98.7 million in 2005. The company did see losses decrease toward the end of the year due to new security practices, but Post said it was too early to tell if it is a trend. “We implemented larger deductibles on the plastic card side. We ended up performing worse than plan,” he said.

CUNA Mutual raised its plastic card rates on Oct. 1, but according to Post that resulted in less than $1 million in new revenue, a fraction of the company's $2.8 billion in revenue.

Post still thinks the company's customer service needs work. It is currently consolidating a number of service centers and providing additional training to reps. It broke ground on its new 108,000 square-foot Customer Operations Center in Forth Worth, Texas on Aug. 1. The $12 million facility, expected to be complete this spring, will have the capacity for 700 employees. That was part of a total of $18 million CUNA Mutual spent last year investing in new technology systems and facilities.

Given the solid year, Post is committed to keeping employees focused on the prize. “Employees are going to be running around giving themselves high-fives. We want to keep them on track. There is a lot more to do,” he said. –pgentile@cutimes.com

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CUNA Mutual Increases Profits 36% in '06; Three-Year Plan Moves to Year Two

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