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Southern Cross posts big loss

Southern Cross has had to write down the value Aetna health to $20 million.

Wednesday, September 18th 2002, 3:15AM

Southern Cross lost $41.2 million in the year to June 30, after writing $19.1 million off the value of recently acquired subsidiary Aetna Health. The health insurer said the rest of the loss was due to a lower underwriting surplus, lower investment earnings and higher overheads.

A big contributor to the lower underwriting surplus was the four months delay in implementing planned premium rises that were caused by computer problems. This delay cost about $17 million in lost premium income.

As a result of the loss, the insurer’s reserves have dropped to $179.6 million from $220.8 million a year earlier. Though these are adequate to meet its needs according to accountants PricewaterhouseCoopers, Southern Cross says reserves will be rebuilt to near their previous levels by 2005. It also expects to post an operating surplus next year.

The insurer said claims payments represented 96 cents of every dollar collected in premiums. As a result Southern Cross is spending more on claims and administration than it earns.

The $19.1 million write-down in Aetna’s value means the subsidiary is now valued at only $20 million.

However, Southern Cross stood by its decision to buy the subsidiary and the price it paid.

Court action, which delayed the Aetna purchase, and processing problems that arose when Southern Cross swapped to using Aetna’s computing system, wiped out $8 million of expected synergies from the purchase, it said.

However, Southern Cross insisted the Aetna write-down had not influenced its decision to raise premiums earlier this year. The rises were driven by escalating claims, the need to restore a surplus and competitive pressures, it said.

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