Tuesday 4th October 2016
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Accident Compensation Corp's investment team delivered a net 10.2 percent return on assets in the 2016 financial year, outperforming its benchmark for a 21st year and helping offset the impact low-interest rates had on increasing the theoretical cost of future claims.
The investment portfolio grew to $34.67 billion as at June 30 from $32.38 billion a year earlier, generating revenue of $3.21 billion in the 12 month period, ACC said in its annual report. Investment revenue was more than twice what the state-owned workplace insurer had budgeted for, though down from the $3.94 billion in 2015.
Still, ACC reported a net deficit of $3.37 billion, compared to a surplus of $1.61 billion in 2015, as the persistence of low-interest rates around the world and heightened volatility in financial markets increased the 80-year projected future costs of claims to $76.7 billion. When that's converted to present day values it equates to $36.66 billion, $6.33 billion higher than 2015.
"If you look over recent periods we've had everywhere from close to a $5 billion surplus to this deficit - it's hard to say what's going to happen right now, but we have seen further downward pressure on interest rates since the beginning of the year," chair Paula Rebstock told a briefing in Wellington. "Our investments are well above budget and we're doing very well in that space, but it will not be enough to compensate.
"Our current projected returns are close to half of what we earned in the last year. That simply reflects the current market returns. But at some point interest rates will come back and you'll see just the opposite effect."
ACC's investment portfolio is central to help fund the insurance scheme and has outperformed its benchmarks in 23 of the past 24 years, achieving compound returns of 10 percent a year over that period.
Its $2.96 billion of New Zealand equities delivered the biggest return in the year at 21 percent, followed by $1.36 billion of New Zealand and Australian property and infrastructure generating an 18.9 percent return, and $159 million of New Zealand private equity at 18.8 percent. ACC's $5.94 billion of global equities fell 5.6 percent, and $1.51 billion of global bonds shrank 0.2 percent, its only asset classes to report declines, while $11.7 billion of New Zealand bonds returned 11.3 percent and $7.12 billion of NZ index-linked bonds generated an 11.3 percent return.
ACC decided to reduce the weighting allocated to banks in its Australian equity portfolio, which it said enhanced returns as banks underperformed the rest of the ASX and after reviewing its policies decided "it would be appropriate to move towards a modestly greater tolerance for financial risk."
Rebstock said that increase in risk wouldn't be material as the fund remained a relatively conservative investor.
"We are actively looking for new opportunities with the right risk-return payoff and ACC is a relatively risk averse investor," she said.
Chief financial officer Mark Dossor said the average duration of its investments was around seven years, which made the interest rate fluctuations weigh more heavily on the bottom line.
"The importance of being fully funded or having assets and liabilities that match is that if those two are growing at the same rate it means you can just levy for next year's cost," Dossor said.
ACC's solvency rate for the work account was 112.8 percent, 117.2 percent for the earners' account and 107.8 percent for the motor vehicle account, meaning they were all above the mid-point of the 100-to-110 percent target band that allows for the insurer to propose levy reductions.
The insurer received 1.93 million claims in the year, up from 1.84 million in 2015, and paid out $3.5 billion on claims, compared to $3.94 billion. Motor vehicle claims rose 11 percent and earners accounts were up 6.2 percent.
Rebstock said the increase in claims was closely correlated with economic growth and expanding migration. The greater number of motor vehicle claims was linked to more cars on the roads and cheaper fuel encouraging people to drive more.
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