Mutual & Federal

Mutual & Federal (M&F) is the second-largest short-term insurer in South Africa, with offices in South Africa, Namibia and Botswana. It provides a full range of insurance products to commercial and domestic customers, principally in four major portfolios: Commercial, Personal, Risk Finance and Credit.

The Commercial portfolio is the largest, with a broad spectrum of customers ranging from small businesses to large corporations. It covers primarily property, accident, motor, engineering, marine and crop insurance risks.

The Personal portfolio provides domestic household, motor and all-risk short-term insurance products to domestic customers of all ages and various financial groups. It offers white-labelled intermediary-branded products and an in-house branded product,Allsure, which provides comprehensive cover. It also includes a hospital cash plan and personal accident policies as well as low-cost products covering livestock and informal dwellings.

The Risk Finance portfolio, comprising alternative risk transfer products, is provided by a highly capable team which is well regarded in the industry as one of South Africa's largest suppliers of risk financing solutions, primarily to medium-sized commercial customers.

The Credit portfolio is underwritten by a subsidiary of M&F and is offered within a market segment where the group dominates the market.

Business model

The company's success is built on strong relationships with intermediaries, who introduce more than 90% of its business. These intermediaries range from small and medium-sized operations concentrating on domestic business to large national corporate brokers who provide specialised services and manage large portfolios.

Each portfolio is managed in line with the market within which it is offered. The Personal portfolio comprises higher volumes of lower-value premiums and generally requires less underwriting involvement, while the Commercial portfolio includes larger risks requiring detailed surveying, underwriting and reinsurance structuring. Because we are able to offer this full range of services, we can tailor products to customers' specific requirements and help them with their overall risk management.

M&F operates centralised claims and administration for the risks written. Management of the investment portfolio is subcontracted to Old Mutual Investment Group South Africa.

Product and service developments

We are extensively overhauling the M&F policy administration systems to ensure faster, better service and greater processing efficiency. To date we have widely implemented paperless transaction processing and introduced a new customer-orientated computer system for our flagship domestic insurance product,Allsure.

Our claims service and settlement philosophy remain a primary source of competitive advantage, and our reputation for fast, efficient and fair claims settlement continues to attract and retain customers and intermediaries.

Market overview

Although the short-tem insurance market grew in 2009, the growth was slower than in previous years due to the unfavourable economic climate. There was a sharp decline in vehicle and home sales and domestic business was particularly affected.

The market remains stable and established insurers continue to generate underwriting surpluses, albeit at a lower level than in the previous five years. Market data suggests that bank- and broker-owned insurers have shown above-average growth and direct insurers have continued to expand faster than the overall market. In some cases this has been at the expense of traditional insurers, who are continually seeking ways to regain market share.

The continuing emergence of a larger middle class and the high levels of infrastructural spending in the country have, to some extent, moderated the impact on insurers of reduced consumer spending.

The market continues to be firmly regulated by the Financial Services Board.

Strategy

M&F aspires to be the strongest and most successful short-term insurer in its chosen markets. We remain focused on profitability while addressing new and existing markets, channels and products to generate growth.

We are strongly committed to the intermediary channel and further development of broker relationships.

A new management team is in place to deliver the strategy that will make M&F a multi-channel, process-efficient company that is able to service all of its channels cost-effectively and in a way that will drive end-customers to demand the Mutual & Federal brand.

Operational highlights 2009

In 2009 we implemented a regionalisation model for our operations, introduced theAllsurecomputer system and improved the group's Business Process Management capability. During 2010 and 2011 the new computer system will be rolled out to other portfolios and the business processes will be further refined to enhance customer service.

The restructured group has brought a greater proportion of customer-facing staff onto a widely distributed platform, which will help to promote growth.

These changes are also expected to deliver further cost reductions in 2010 and 2011.

Underwriting profitability depends on the fundamental soundness of the company's portfolios, management's diligence in rate setting, and ongoing adherence to responsible underwriting standards.

Combined with strong management measures, the significant improvement in investment markets has helped to strengthen overall company solvency.

Performance in 2009

Return to stability

* The ROE is now shown over a 1 year average equity base (previously 3 years average) to achieve consistency with the rest of the Group.

IFRS AOP results

Following adverse investment conditions and high levels of claims in early 2009, the company recovered well in the later parts of 2009. Management action on profitability led to the cancellation of some personal scheme business in 2009. This contributed to a fall in premiums for 2009 as whole.

Despite the underwriting loss recorded in the first half, there was a significant improvement in underwriting results during the second half and an overall underwriting surplus of 2% was achieved. This followed the implementation of various corrective measures and a generally improved trading environment.

Investment returns were strongly higher in 2009 as world financial markets returned to greater stability. Total actual investment return for the year amounted to R660 million compared to a loss of R146 million in 2008.

During the year the company completed the implementation of a sophisticated state-of-the-art system for processing a large portion of the personal portfolio. Whilst this caused unfortunate declines in service levels in the first half these were largely remedied by the year-end and have resulted in substantial improvements in processing opportunities for customers and intermediaries.

Solvency margin

Following improvements in investment return and underwriting stability during the second half, the solvency margin (the ratio of net assets to net premiums) improved to 56% at year-end (2008: 41%). This is well within our target range.

Acquisition of minority shares by Old Mutual

The acquisition of the minority shares in M&F was concluded successfully in early February 2010. Although the finalisation was delayed by certain outstanding approvals, the overall process was completed with limited disruption to staff and customers. Management can look forward to closer working relationships with Old Mutual and increased opportunities for growth and profitability through joint ventures and other cooperation.

Marketing

We maintained our 'short moments' advertising campaign and approach in 2009. This emphasised the importance of reliable insurance and has a strong 'people' theme to further reinforce the relationship element of short-term insurance. The advertisements also aim to foster relationships with younger individuals from diverse cultural and ethnic backgrounds, as our customer base has traditionally been predominantly white and middle-aged.

The impact of our advertising and marketing has been somewhat constrained over the past two years by the potential sale of the company. But even though this resulted in some loss of drive and focus, market research indicates that the 'short moments' campaign has been successful in promoting name and logo recognition.

Customer service

Customer service suffered to some extent during 2009 as a result of the restructure, system implementation and uncertainty surrounding future company ownership. Management undertook extensive roadshows to meet intermediaries and discuss service difficulties; these meetings again evidenced the strength of our broker relationships, which will continue to improve as intermediaries experience the significant benefits which the new systems offer.

People

M&F has always enjoyed a reputation for having the most capable and qualified employees and is often regarded as the training ground of the short-term insurance industry. This is the result of our ongoing commitment to training and effective operation of recognition and reward programmes. We continue to improve employee satisfaction and drive transformation of the business; and we have made significant strides towards meeting employment equity objectives despite considerable difficulty in recruiting suitably qualified staff.

Risk

We continue to manage our risks and develop our Risk Management capabilities in alignment with the Group's Enterprise Risk Management framework. Refer to Risk and Responsibility section for details relating to Risk Management.

Priorities for 2010

M&F has been through a significant period of restructuring and systems implementation over the past two years. This was difficult but was an important and necessary step towards creating a sound base on which to grow revenue over the coming years. We now have the following priorities:

• Growing the business through a multi-channel distribution model
• Maintaining process enhancements and optimisation by continuously improving and bedding-down the business model
• Completing the IT strategy of moving to state of the-art technology platforms
• Maintaining tight control over capital and solvency.

Outlook

Despite unusually heavy rains in the Johannesburg area of South Africa, which led to higher than usual personal-lines claims in the early months of 2010, we remain confident with regard to our underwriting prospects.

M&F has a strong brand in the southern Africa market and good relationships with its intermediary partners. The next few years promise much as we look to leverage these relationships, as well as good systems and processes, in order to drive profitable and sustainable growth.