Moonstone Monitor 3 July 2008 : Mutual and Federal

Mutual and Federal's "Restructuring"

Call it what you like; staff layoffs are a painful exercise for all concerned, particularly those losing their jobs in these tough economic times.

The decision by Mutual & Federal to reduce its staff complement by 600 (20 percent of its workforce) is possibly the first, but not the last that we will see in the present economic climate.

Despite claims from M & F that the process forms part of a restructuring exercise and is not done for economic reasons, one cannot help but think that shareholder liabilities also played a large role in a decision of this magnitude.

According to Keith Kennedy, MD of M & F, the aim with the staff reduction is to have a successful and more focused group delivering better returns. With the share price having fallen from R30 to R18 in eleven months, one can understand that shareholders are uneasy, particularly the major shareholder, Old Mutual.

It makes good business sense to prepare in advance for lean times, not all of which is brought on by the current economic climate.

While some of the issues like fraud are being addressed, and negative returns on investments will not last forever, there are other, new challenges that have to be faced.

One of these is the impact of the thousands of uninsured vehicles on the road on profit margins. Most of the owners of such vehicles are also not in a position to make good the cost of repairs to an insured person’s vehicle where the uninsured was the cause of the accident.

Add to this the impact of the massive increase of vehicles on the road, many of which cannot be labeled as totally road worthy, and you are faced by a challenge, the remedy of which is not really in your hands.

From our perspective as financial advisors, one has to question what the impact of staff reductions will have on service levels to our clients and us. Whatever steps are taken, and unless twenty percent of the current staff members are “dead wood”, the most likely outcome will be that more responsibilities will be delegated to us, without commensurate reward, leading to yet another cost factor to the already overburdened FSP.

A further implication could be a reduction in service levels, which means that, yet again, the interests of clients are seen as less important than those of shareholders.

This may provide short-term relief, but the damage to the proud reputation of a leading insurer could prove costly in the long run.