CAL/ FEDSURE INTEGRATION 23 NOVEMBER 2001. Presentation Outline Philosophy Martijn Appelo Products and Valuation Martijn Appelo Integration Progress Hennie.

CAL/ FEDSURE INTEGRATION

23 NOVEMBER 2001

Presentation Outline

• Philosophy Martijn Appelo

• Products and Valuation Martijn Appelo

• Integration Progress Hennie Nortje• System Conversion Hennie

Reyneke• Accounting and Investments Andrew

Birrell

Looking Back

An agreement was reached with Fedsure on24 August The agreement is effective from 31 May 2001

Terms• CAL has reinsured individual life policies

underwritten by Fedsure ILD • CAL assumes responsibility for the

administration of the policies covered in the reinsurance agreement

• Investec 29% shareholder in CAL

New Business Cost : R2 400 - R4 400

Renewal Cost : R 460 - R 250

Systems : Policy Administration - Fedsure ILD / Norwich

Business Processes - Fedsure ILD / Norwich

Large number of isolated projects

What we found

Physical Locations

Cape Town Johannesburg Other

Systems Programmers Programmers

Accounts Management Department

Call Centre Department

Branches Various

Head Office Staff

Initial Decisions

• Investment administration to IAM

• Close new business

• Cost is priority

• CAL : Process

: Systems

: Location

Life Assurance Company Activities

• New business• Monthly administration• Periodic administration - statutory returns• Investment functions• Internal administration - staff

- location

Life Assurance Company

Example: Monthly administration:

- Collect premiums

- Allocate premiums

- Accounting

- Investments

- Policy alterations

- Policy benefits

- Policy charges

- Reassurance

- Record keeping

Life Assurance Company

Functionality required

Shortfalls

Completeness of computerised systems:

- Fedsure

- Norwich

- Capital Alliance Life

Functionality Shortfall and Importance

Values : Very High

Commission : Medium

Multiple investment funds : Low

Investment switches : Lower

Escalation methodology : Medium

Reassurance : Low

Loans : High

Business Decisions

Priorities:

1. Conversion - Cost

2. Service Levels - Cost

3. Investment returns - Outsourced

4. Policy retention - Result

Business Decisions

Systems:

• Conversion first

• Solve existing system issues after conversion

Perspective:

• Systems

• Products

• Data clean-up

Completeness of Computerised System

Fedsure, Norwich, CAL:

• Policy administration

• Accounting

• Investment accounting

• Matching exercise (policy/ investment)

• Actuarial interface

• Analysis of surplus

Fedsure Policies in Force

ProductCategory

SubProducts

Policies In-Force

FedsureNamibiaPolicies

Annuity 7 1,144 100

Debility 5 11,741 746

Disability 1 354 0

Endowment 60 110,649 3,295

RA 8 42,355 0

Term Assurance 1 1,594 0

Whole Life 30 120,337 3,608

TOTAL 112 288,174 7,748

Fedsure Ancillary Benefits

Benefit TypeSub

ProductsPolicies in

forceContinuation Option 1 1GIB 9 5,837Lump sum accident death 1 1,007Lump sum accident death andinjury

1 6,379

Lump sum accident injury 1 14Lump sum debility 3 31,024Lump sum disability 5 52,415Lump sum dread disease …………. 4 27,155

TOTAL 34 154,340

Norwich Policies in Force

ProductCategory

SubProducts

PoliciesIn-Force

Annuity 15 7,225Disability 9 1,480Endowment 160 134,289RA 48 25,101Term Assurance 10 486Whole Life 32 37,995

TOTAL 274 206,576

Norwich Ancillary Benefits

Ancillary Benefit CategorySub

ProductsPolicies in

forceLump sum injury 1 133Lump sum HIV 1 175Cover escalation 8 1475

Waiver disability 2 1739

Waiver death 2 1920Daily hospital 16 2495Lump sum accident 2 3554GIB……………………………… 12 5885

TOTAL 116 213730

Product Perspective

Fedlife Norwich

Liability Element Liability Element R'b Code R'b Code

Universal 1,6 352 5,3 663

Unit Linked 1,1 174

Conventional 0,2 445 0,4 326

Annuities 2,2 37 0,6 43

SinglePremiums

1,4

Product Process

• Product specifications - outsource SAAC

• Team: 4 actuaries

4 senior students

2 junior students

3 CAL staff

Product Process

• Reconciliations

- VIP

- Prophet

- Administration system

• Data checks - unknown commitments

• Administration - CAL

• Completion date - February 2002

• System conversion is independent

Integration Progress

Presentation Outline

• Model for success• Integration objectives• Risks• Integration team• Achievements to date• Feedback on Service Level

Agreements• System conversion

Model for Success

• Mergers frequently fail to meet their objectives

Essential steps to ensuring successful integration:

• Sound due diligence• Ensure staff feel secure throughout• Build trust in management• All staff to share a compelling vision• Integrate and streamline systems and

processes

CAL’s Integration Objectives

• Integrate staff• Integrate systems• Business retention• Communicate• Optimise intellectual knowledge• Reduce costs• Relocate staff• Seamless transition for policyholders• Achieve complete integration in 15 months

Risks

• Inherited backlogs• Not achieving Service Level Agreements • Market perceptions• People integration• Manage expectations• Meet timetable deadlines• Pace of integration

The Integration Team

Championed by Martijn AppeloChampioned by Martijn AppeloLead by Hennie NortjeLead by Hennie Nortje

Elize O’Neil

Colin Brazer

Enver Dickson

Laurel Towler

Ernest Pereira

Hennie Reyneke

Brenda Mills

Physical

IT Infrastructure

Skill & knowledge

People

Process

Systems

Communications

To date the integration process has exceeded expectations

Achievements thus far.……...

Integration Process

Physical Integration

• CAL business units relocated• Refurbishment of CAL building• Additional staff parking secured• Office environment established• PABX / switchboard equipment upgraded• Fedsure staff relocated to CAL building

IT Infrastructure

• IT capacity planned• Fedsure system access implemented from

CAL network• User workstations installed• New servers implemented for email,

network, imaging, fax and line of business systems

• New storage area network implemented

Skills & Knowledge Transfer

• Authorisation processes revised• Induction courses facilitated • Call centre multiskilling commenced

• Buddy system adopted

People Integration

• Announcement of new EXCO structure• Announcement of management structure• Management integration seminar held• Employment offers finalised • Organisation structures finalised• Divisional teambuilding sessions held• Fedsure staff loaded on CAL payroll• Restructuring and redundancies finalised• Culture survey and forums conducted

Process Integration

• Business process review completed• Volume estimate established• Standard times for activities identified• Business process requirements

Systems Conversion

• System conversion teams finalised• Responsibilities per team defined• High level systems analysis completed• Annuity system conversion completed• System conversion detailed plan completed• Time table agreed

Staff Communication

• TAXI campaign - created the opportunity for staff to actively participate in the integration….

….further enhancing a feeling of security and comfort amongst staff

TAXI

ENGINE

EOOM

Staff Communication

• Whatzup - a weekly newsletter• Taxi Talk - the official integration

news piece

Taxi Talk

Other Communication

• Editorials • Visits and workshops to intermediaries• Blast faxes

• Policyholder communication

August

Announcementof new structure

Reinsurance agreement signed

Integration teamin place

High level plan for system

conversion

System processes identified

Taxi communicationvehicle in progress

September

Implementation ofnew servers

Relocation ofCAL business units

Intermediaries workshops

Culture surveys& forums conducted

Induction programintroduced

October November

Brief Summary - Achievements to date

Employment offers

Conversion ofannuity system

Refurbishment

IT infrastructure

Physical integration

Surveys & forumsconducted

Staff restructuring & redundancies

Systems conversion plan

Office movescomplete

Item ServiceLevel

AchievementAugust 2001

%

AchievementNovember 2001

%Scanning Current 0% 100%Registered mail Current 0% 100%Refunds 5 days 5% 100%Cancellations 5 days 5% 100%Tax certificates 5 days 5% 100%Complex alterations 10 days 80% 100%Maturities 4 days 0% 100%Death claims 15 days 0% 80%Surrenders 5 days 0% 60%Values 20 days 80% 80%Call abandon rate 5% 4% 8%

Feedback on Fedsure Service Level Agreements

Item ServiceLevel

AchievementNovember 2001

100%Scanning Current 100%Registered mail Current 100%Refunds 2 days 100%Cancellations 2 days 100%Tax certificates 2 days 100%Complex alterations 5 days 100%Maturities 2 days 100%Death claims 15 days 100%Surrenders 2 days 100%Values 2 days 100%Call abandon rate 5% 3%

Feedback on CAL Service Level Agreements

Difficulties Encountered

• Backlogs inherited• Scanning arrears• Restructuring of silos• Relocation of staff• Data statistics• Staff morale• Double deduction of September premiums • Market value adjuster• Volatile markets

02000400060008000

10000120001400016000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

Values Claims

Client services Loans and surrenders

Maturities

Work in Queues

System Conversion

Presentation Outline

• Vision• Objectives• Fedsure ILD systems• CAL systems• Fedsure source CAL target• General conversion approach• Risks• Project plan• Project feedback

Vision

Reduce annual IT costs per Fedsure ILD policy

by 75%

Objectives

• Convert all Fedsure ILD systems to CAL systems before December 2002 - Speed very important

• Business must still meet existing service levels• Reduce Fedsure IT maintenance costs by 75%• Systems must be good not perfect -

manual vs automated• Find short cuts to success • Convert data as-is - do not fix data during

conversion

Fedsure ILD Systems

FADSDocument and letter printing

Clues Client enquiries (Call centre)

Lazarus Norwich policy administration

FANSFedsure annuities administration

Aims Commission administration

Saturn Fedsure policy administration

Eastman KodakWorkflow and images

Data warehouse Copy of all Saturn/Lazarus/Fans data

VIPValuations

Masterpiece General Ledger

InternetMarketing and client/broker enquiries

Fedsure ILD Systems

Annual Costs to run Fedsure ILD systems• Saturn R7.6M• Lazarus R16.9M• Fans/Accounting R3.0M• Aims R2.7M• Workflow R3.6M• Datawarehouse/InternetR3.7M• Other R7.7M• Depreciation R16.7M • VIP minimal

TOTAL R61.9M

CAL ILD Systems

• Sun - CAL policy administration• Hyphen - Annuities

- Payment and Collection• Oculus - Images• Internet - Enquiries• Accountability - General ledger• Prophet - Valuation

Fedsure Source CAL Target

• Saturn Sun / Hyphen• Lazarus Sun / Hyphen• Fans Sun / Hyphen• Aims Sun• Eastman Kodak Sun / Oculus• Fads Fads• Datawarehouse Sun• Clues Sun• VIP Prophet• Masterpiece Accountability• Internet Internet

General Conversion Approach

• 13 Conversion projects• Conversion approach

– High level analysis – Project plan– Detailed analysis– Programming– Testing– Training– Conversion– Verification and audit

• Streamline system processes – will commenceafter conversion

Risks Identified

• Number of CAL technical (IT/Actuarial) resources

• Lazarus product, system and business knowledge

• Caliber implementation• Lack of system specifications• Dependency on a number of key resources• Increase in manual processes• WIP on Saturn/Lazarus at conversion stage• Namibia conversion• Functionality not on target environment

Risks - Feedback

Description Risk ofOccurring

Magnitudeof Risk

1. Number of CAL technical(IT/Actuarial) resources

High High

2. Lazarus product, system andbusiness knowledge

High High

3. Caliber implementation nothappening as scheduled

High Medium

4. Lack of system specifications High Medium5. Losing key resources Medium High6. Increase in manual processes High Medium7. WIP on Saturn/Lazarus at

conversion stageHigh High

8. Namibia Conversion High Low9. Functionality not on target

environmentHigh High

Project Plan

Saving (R'm) O N D J F M A M J J A S O NSaturn 7.6Lazarus 16.9Fans 1.0AIMS 2.7Eastman Kodak 3.6FADS -Prophet -Call Centre 9.0DWH/Internet 3.7Accounting 2.0Other 7.7Depreciation 16.7TOTAL 61.9 (excl. R9M from Call Centre)

2001 2002

Project Feedback

• So far completed– High level analysis– Conversion project plan for all projects– Converted annuities (Fedsure)– Created Saturn file structures on Sun system

• November- milestones– Eastman Kodak conversion– Train 10 Jhb CC staff members– Train 4 Fedsure staff members on Sun system– Values investigation

Accounting and Investments

Accounting and Investments

Both the accounting and investment processes

in Fedsure ILD and Norwich are considered unsatisfactory,

and substantial changes are required

Accounting and Investments

Some of the major challenges

– Fedsure ILD ran +-150 different investment portfolios

– Fedsure (Jhb) and Norwich (CT) accounting areas were never integrated

– No integration of accounting processes into the line of business areas (as per CAL)

– Most accounting processes were manual

Accounting and Investments

Cont.

– Jhb Life staff processed journals, but never pulled the accounts together.

– All cashflows in/out of Fedsure went through the “Net Main Life Fund” bank account i.e. were not allocated to specific portfolios at source. Norwich followed a similar process

– Historical reconciliations that were never cleaned up

(claims, premiums, loans etc)

Progress to date - Accounts

So far

• Relocation of Jhb accounts staff to the CAL building - simplifying the management challenge

• CAL has control of all the ILD bank accounts, and implemented new authorisation processes

• All expenses are now approved via the established CAL processes

• All staff briefed on the CAL philosophy regarding financial controls

Progress to date - Accounts

Cont.

• Staff are now held accountable for producing correct reconciliations

• Reconciliation of investment assets done at CAL• Investec to provide “clean” accounts as at 31

October by 31 December 2001. We are assisting with the process

• We expect to take over the management accounting process from the CT corporate accounting area from January (Nov & Dec management accounts)

Progress to date - Accounts

• We have teams cleaning up historic reconciliations. Progress to date :

Norwich Outstanding Reconciliations

July October

Claims R276m R150m

Loans on out of force policies(to be cleared)

R175m R109m

Unapplied cash loans R77m R48m

Desired outcome - Accounts

• To move accounting processes into the line of business areas - ensure that all accounting entries are correct at source

• Achieve the CAL standards in terms of data– no more than 20 unallocated debit orders at the end of

each month (out of a total of 230 000)– reconcile the line of business systems to the general

ledger every night– have a high degree of comfort with the credibility and

integrity of accounting data– produce management accounts within 3 weeks of month

end - keep a close finger on the pulse of the business

“Reality check”

• Much work to be done • Historical issues: We have a broad knowledge of

issues and have a methodical plan in place• Full implementation of CAL process only once

conversion completed• Complexity in finalising the figures for September

2001 interim report• Expectation that this could extend to March 2002

results - under considerable pressure to finalise figures to acceptable degree of accuracy

• Have warrants from Investec regarding our exposure to reconciliation errors and errors in current assets and liabilities

Progress - Investments

• Investment performance critical to policyholder and shareholder returns.

• Existing Fedsure and Norwich processes were unnecessarily complex

• Have simplified investment process by creating unitised structures (“building blocks”)

• Have reduced 150 portfolios down to 14• Asset managers can now focus on returns per

building block, instead of administration• Simplifies the investment accounting and unit

pricing process at CAL

Previously

• Product level portfolio: allocation to»Equities»Bonds»Cash»International»etc.

• Transactions at a portfolio level

Equities Equities BlockBlock

Bonds Bonds BlockBlock

Cash Cash BlockBlock

Product 2Product 2

etc.

Transactions at a building block level

Now

Product 1Product 1

Progress - Investments

Cont.• Keeping close track of Asset Liability Matching

issues, especially the annuity portfolio• Took on appropriate portfolios• No specific asset concentration risks (2.9% of

Inhold and 3.5% of Saambou in total)• No “strategic” holdings • Relatively high weighting in bonds

Progress - Investments

Cont.

• Still have some small holdings to tidy up• Have unitised the Fedsure property portfolio,

no exposure to individual properties. Participate in the unitised structure with Fedsure Group Benefits and Fedsure shareholders

• Market value of properties determined at 31 May 2001

• Ultimately the proof of the process will be in the medium to long term investment returns