NASHVILLE, Tenn. -
The next task: show credit unions CUNA Mutual can add to their own squeezed income statements with what the company's CEO is calling "free money" (see story, below).
Since being named CEO of CUNA Mutual Group in 2005, Jeff Post has overseen one of the most comprehensive reviews in the company's history. Among the moves Post made was to bring in David Marks from the Travelers unit of Citigroup. Marks, in turn, has brought a little of Wall Street to Mineral Point Road, having hired 29 investment professional from companies that have included Merrill Lynch, Jefferson Pilot, Allstate, Citigroup and other firms. The goal: greatly expand the portfolio diversification capabilities of CUNA Mutual's staff, which Post and Marks saw as being too "narrow."
Closing, Surpassing The Gap
CUNA Mutual has approximately $17 billion in assets, of which about $8 billion in premium dollars at any one time that have yet to be paid out. It also manages approximately $8 billion more in third party funds.
"We were 30 basis points behind the industry average in portfolio yield for like companies," Post said. "By broadening out we felt we could improve that. In 16 months we have added 114 basis points with no change to quality, duration or liquidity. We've gotten into asset classes that other insurance companies were into but we were not, such as private placements, bank loans, emerging market debt and derivatives. That is in essence the kinds of people we have brought in, experts in those areas."
Several of those investment experts were rated as either No. 1 or No. 2 in their respective category; 22 of the 29 brought had worked with Marks earlier in their careers.
Why would Masters of the Universe relocate to Madison, Wis. after working in financial hubs such as lower Manhattan and Chicago?
"They were coming from larger organizations where there is a lot of bureaucracy and a lot of levels of authority to go through," responded Marks. "At CUNA Mutual, as long as they are acting within our guidelines, they do not have the bureaucracy. They can come to an organization where they are No. 1, where they get to make decisions and they are paid for performance."
Added Post, who returned to Madison after having earlier attended the University of Wisconsin, "Madison may not be a big draw, but for younger folks who have kids it is. They don't have a two-hour commute into Manhattan."
No Change To Risk Profile
Both Post and Marks, who met when Post headed up Fireman's Fund, a unit of Allianz, where Marks worked, stressed several times the significant increase in CUNA Mutual's investment income has come without any change in its overall risk profile, as the insurance industry is already pretty heavily regulated.
"When I arrived CMG invested in stocks and corporate bonds and some mortgage-backed," explained Marks, who oversaw a $55 billion portfolio while at Citigroup Insurance Investments. "Most assets were in those three segments. Now we're in 15 to 16 segments. You can do that if you have the expertise to underwrite and manage."
Post noted CUNA Mutual's portfolio yield has grown to 6.04%, up 4.89% and 60 basis points above the industry average. "That translates into better pricing on products and a healthier bottom line for CUNA Mutual, which goes back to our owners," he said.
Calling previous performance "inconsistent and spotty," Marks said another area where the company has sought to improve is in management of third-party assets such as 401(k)s and pensions. It has now reorganized management of those assets, as well.
"We want to consistently perform in the top half on an ongoing basis," he noted, pointing out that CUNA Mutual recently has boosted its core equity profile into the top 1% of all equity funds, and that it beat the S&P 500 by 500 basis points.
"We brought in not just new people but new technology and a new trading room. We are communicating now; we've made tremendous progress in changing the organization," Marks told the Credit Union Journal. "We have a more open architecture. We had 14 401(k) options, today we have 27. They are managed by some of the best people in the industry."
Ahead of Projections
Marks said the portfolio performance improvement is tracking ahead of what he had projected when he joined CUNA Mutual. He noted he had thought that if the right people could be put in they might be able to generate a yield increase of 25 to 50 basis points in the first 12 to 18 months.
"But we got some really talented people early," Marks explained. "It's not that the dollars are not fungible, it's having the relationships so people know you and know they can trust you. We have been better able to generate yields and performance faster than anticipated. There is a limit to it: we might now be able to grow one or three or five BPs per month."
Added Post, "The sky would be the limit, but we're not going to screw around with the risk and liquidity. Will the increases ultimately level off? Yes, if interest rates move up our performance increases, but so does everyone else's."
The average duration on the portfolio is 4.3 years, and for 2006 that translated into $60-million in additional profit for the company, said Post, who noted that even if performance remains the same that $60-million is recurring annual revenue.
Marks called the second "iteration" of CUNA Mutual the creation of an asset-management business. The goal is to double third-party assets over five years. Many credit union CEOs who have 401(k)s managed by CUNA Mutual have seen a significant increase in their personal returns.
"We have seven proprietary funds, and those represent more than 50 opportunities," he said. "Some of these are the best in the business. We have something no other mutual fund can offer that's listed, and that is Wellington (Funds), which is only for institutions and is closed to outsiders, but is available to us due to our relationships."
"What's really cool is that it's not just CUNA Mutual that benefits, we are able to return this to credit unions with lower rates," Post said. "Credit unions also benefit from the investment advisory product."
