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Accident Compensation Corp's investment team delivered a net 5.7 per cent 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 $34.67b a year earlier, generating revenue of $2.05b in the 12 month period, ACC said in its annual report. Investment revenue was ahead of the $1.46b that the state-owned workplace insurer budgeted for, but down from the $3.25b it made in 2016.
Still, ACC reported a net surplus of $607 million, compared to a $3.37b deficit in 2016, and outperforming its budgeted $135m deficit. Net levy revenue rose 4.6 per cent to $4.1b while claims costs dropped more than 50 per cent to $4.89b, due largely to the effect of changes in economic assumptions made.
"Our best guess is that future investment returns will average about 5 per cent 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 per cent 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 $6.22b of global equities delivered the biggest return in the year at 17 per cent, followed by $2.81b of New Zealand equities at 13.2 per cent.
"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 $8.33b of New Zealand index-linked bonds fell 0.4 per cent in the year, and its $33m of interest rate overlay shrank 0.2 per cent, its only asset classes to report declines. Its New Zealand bonds, worth $12.13b, gained 0.7 per cent in the year.
ACC's solvency rate for the work account was 121.7 per cent, 114.3 per cent for the earners' account and 110.9 per cent for the motor vehicle account, meaning they were all above the mid-point of the 100-to-110 per cent 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 per cent from 2016, and paid out $3.71b on claims, lower than its $3.72b budget but higher than the $3.5b paid in 2016. Motor vehicle claims paid rose 7.5 per cent to $513m and earners account claims were up 7.8 per cent to $1.28b.
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."