Almost $500 million could be out to tender as insurance firm Southern Cross Health Society looks to diversify away from a pure fixed income play for its investment funds.
It is understood Southern Cross has issued a request for proposal (RFP) with a mandate to provide a diversified solution for the insurer’s investment pool.
As at June 30 last year Southern Cross reported funds under management of $492 million, all of which has to date been invested in fixed income instruments.
According to the Southern Cross 2015 accounts, about $425 million was in “bank deposits, commercial paper [and] floating rate notes”.
Of the remainder, just over $42 million was in “other bonds”, almost $17.5 million in local government authority debt, and a further $7.2 million with “state-owned enterprise bonds”.
More than half of the investments as at June last year were in short-term instruments (maturity of one year and under) with a further $80 million due to mature within two years. About $150 million of the Southern Cross investments had maturities of between two to five years with only $6 million in longer-dated bonds.
“The fair value of fixed rate investments can fluctuate depending on changes in interest rates. The Group’s policy is to hold all investments until maturity,” the Southern Cross annual report says. “This eliminates any effects of fair value changes to the investments upon realisation, however unrealised fair value changes are recognised in determining the surplus or deficit before tax in the consolidated statement of comprehensive income for each period.”
In the report, Greg Gent, Southern Cross chair, said as a friendly society without access to external capital the business particularly “requires prudent management of a strong capital base”.
“In the past year we generated approximately $23 million in investment income, an increase of 24% from the previous financial year that is largely attributable to higher yields and gains from the revaluation of our investments,” Gent said.
However, with interest rates trending downward, Southern Cross edged up the risk scale over the 2014/15 fiscal year, reducing exposure to AA-rated bonds from about $313 million to $273 million during the period. At the same time the group’s holdings of unrated bonds more than doubled from $22.8 million in June 2014 to $46.7 million a year later.
A Southern Cross spokesperson confirmed the investment business was out to tender with a decision expected some time in June this year.
“While we’re in the tender process it’s not appropriate for us to comment any further at the moment,” the spokesperson said.
Southern Cross has also hired ex Russell Investments NZ consultant, Daniel Musset, in a part-time capacity. Mussett, who launched his own business, ALSA Consulting, last year has taken on the role as Southern Cross investment manager for two days a week.
Officially known as the Southern Cross Medical Care Society, the group of health-related insurance businesses last year reported annual premium revenue of over $817 million, generating a net cash surplus of $1.65 million after claims, costs and investment activities.
Last month Southern Cross launched a life insurance arm, selling policies backed by US-headquartered firm Cigna Life.