Accident Compensation Corp was disappointed with a 9.9 percent investment return in the June 2018 year, caused in part by its early decision to pare back its exposure to global equity markets.
The state-owned compulsory workplace insurer’s investment team technically outperformed their benchmarks by 0.01 percent in the 12 months ended June 30, with investment earnings of $3.57 billion on its $39.64 billion portfolio. However, the return was 0.1 percent below ACC’s benchmark after adjusting for $28 million of direct investment costs, such as broking fees and foreign withholding tax, and $52 million in management costs.
“This was a disappointing result as we hope to outperform our benchmarks over time by a margin that is significantly higher than the costs of managing our investments,” the annual report said. “In particular, ACC’s returns were adversely affected by decisions to hold a lower-than-benchmark exposure to equity markets throughout the year.”
ACC’s investment portfolio has achieved compound annual returns of 10 percent during the past 26 years and outperformed the benchmark in 23 of those years.
Last year the corporation predicted future investment income would fall after delivering a 5.7 percent return. At the time, the insurer said it believed equity market valuations were at levels unlikely to keep delivering the strong returns investors had become accustomed to in the preceding eight years.
In the 2018 financial year, ACC held $3.09 billion of its investment portfolio in New Zealand equities, $1.77 billion in Australian equities and $6.33 billion in global equities.
Stocks on Wall Street and New Zealand’s own S&P/NZX 50 index broke new records earlier this year, but have been under pressure in recent weeks as investors gauge whether threats to global growth and an increasing number of central banks raising interest rates will limit future returns.
The Crown entity again warned equity market valuations are at levels unlikely to keep delivering strong returns. However, given the decline in bond yields, ACC still holds significant stock investments because fixed-income investments are unappealing and equities provide some diversification against risks to bonds.
ACC said it invests heavily in New Zealand because it’s easier to match its claims liabilities with local assets and that its internal management costs are lower than external investment teams for international assets. The insurer owns about 3.5 percent of NZX’s available shares, 53 percent of the government’s inflation-indexed bonds, and 7 percent of regular government bonds.
Tailwinds for the portfolio in 2018 included out-performance in its bond holdings, strong gains from the sale of merino clothing manufacturer Icebreaker, and revaluation gains on Kiwibank and some Auckland real estate. The failure of NZX-listed CBL Corp was a drag on its New Zealand equity performance.
ACC posted a surplus of $28 million in the 12 months ended June 30, compared to a surplus of $602 million a year earlier. The insurer reinvests surpluses back into the scheme. The smaller surplus was due largely to a 7.9 percent increase in claims paid, at $4.01 billion, and a $2.87 billion increase in the actuarial valuation of future claims liabilities, compared to a $1.08 billion increase in the June 2017 year.
The insurer wants to raise some levies from next year to help meet those projected cost increases in the face of lower investment returns. The government has said it will need some convincing to approve an increase.
ACC’s levy consultation also accounts for a long-running error that saw 300,000 business customers overcharged about $100 million over 15 years. It will refund affected customers and pay interest. It’s received about 2,000 inquiries since announcing the error a fortnight ago and a levy refund webpage has had 20,000 views.