ACC predicts future investment revenues will fall on declining returns from equities

Accident Compensation Corp's investment team delivered a net 5.7 percent return on assets in the 2017 financial year, outperforming its benchmark for the 22nd year, but warned its returns may fall behind increasing claims.

The investment portfolio grew to $36.63 billion as at June 30 from $34.67 billion a year earlier, generating revenue of $2.05 billion in the 12 month period, ACC said in its annual report. Investment revenue was ahead of the $1.46 billion that the state-owned workplace insurer budgeted for, but down from the $3.25 billion it made in 2016.

Still, ACC reported a net surplus of $607 million, compared to a $3.37 billion deficit in 2016, and outperforming its budgeted $135 million deficit. Net levy revenue rose 4.6 percent to $4.1 billion while claims costs dropped more than 50 percent to $4.89 billion, due largely to the effect of changes in economic assumptions made.

"Our best guess is that future investment returns will average about 5 percent per annum (about half what they have been in the past), and our best guess is that ACC will need to grow its reserves portfolios by about 4 percent per annum in order to keep pace with growth in ACC's outstanding claims liabilities, due to factors such as inflation and increasing population," the report says. "Given the two-sided risks around both of these forecasts, there remains a significant probability that future investment income could be insufficient to match the long-term growth in ACC's claims liabilities."

ACC's investment portfolio is central to help fund the insurance scheme and has outperformed its benchmarks in 24 of the past 25 years, achieving compound returns of 10 percent a year over that period.

Its $6.22 billion of global equities delivered the biggest return in the year at 17 percent, followed by $2.81 billion of New Zealand equities at 13.2 percent.

"Equity markets have risen to valuations from which we believe it is unlikely that equities could continue to deliver returns in the next several years that are as strong as investors have experienced in the past eight years," ACC said. "Nonetheless, ACC continues to hold significant investments in equity markets because low bond yields mean that the alternative of investing in bonds is unappealing and because equity investments may provide diversification against some risks that could affect bond investments."

ACC's $8.33 billion of New Zealand index-linked bonds fell 0.4 percent in the year, and its $33 million of interest rate overlay shrank 0.2 percent, its only asset classes to report declines. Its New Zealand bonds, worth $12.13 billion, gained 0.7 percent in the year.

ACC's solvency rate for the work account was 121.7 percent, 114.3 percent for the earners' account and 110.9 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 1.95 million new claims in the year, up 0.9 percent from 2016, and paid out $3.71 billion on claims, lower than its $3.72 billion budget but higher than the $3.5 billion paid in 2016. Motor vehicle claims paid rose 7.5 percent to $513 million and earners account claims were up 7.8 percent to $1.28 billion.

In a statement, ACC board chair Paula Rebstock said ACC "remains in a strong financial position to cover the cost of injuries now and in the future."

"The ACC scheme remains very strong with the levied accounts fully-funded. New Zealanders can have confidence in the financial sustainability of the scheme," Rebstock said. "The solvency of the levied accounts remains above our funding policy's targets which allowed us to lower levies for motor vehicle, work and earners' levy payers."

(BusinessDesk)