LOUISVILLE, Ky. -- Diversified Financial Products Inc. devised a specialized synthetic GIC targeted to not-for-profit hospitals.
The Hospital Portfolio Return Optimizer, or Hospital PRO, was developed for use in the not-for-profit hospital investment pools, a market with more than $200 billion in investible assets.
Harvey E. Willis, director of institutional business for DFP, said Hospital PRO is a way for many hospitals to minimize volatility.
Hospital PRO is issued through three insurance companies -- Common Life Insurance Co., Peoples Security Life Insurance Co. and Monumental Life Insurance Co.-- all members of DFP's parent AEGON Insurance Group.
The guaranteed investment contract wraps a core of managed bonds with a guarantee of a return slightly above the index, which allows a hospital to amortize the volatility of the market over an extended period of time. DFP uses the Lehman Brothers Aggregate index as a benchmark and has subadvisers (often times chosen by the client) manage the underlying portfolio in an enhanced index strategy.
The strategy can include investments in high-yield or longer-duration bonds.
Hospital PRO differs from DFP's other synthetic GIC products in that the product is purchased by clients like an annuity, so hospitals do not hold the fixed-income assets in their name.
The wrapper also allows hospitals to report the fixed-income assets at book value rather than at market value, which prevents the reporting of short-term gains and losses on balance sheets. A change in an accounting rule -- Statement of Financial Accounting Standards 124 -- was one of the impetuses for the creation of PRO, said Mr. Willis. The new rule forces nonprofit organizations to report investments at market value.
Clients also are allowed to withdraw cash at a rate of up to 10% at market value each year. The GIC is an "evergreen" contract with a provision to reset the crediting rate (the interest rate on the book value) quarterly, annually or semiannually, depending on the client. Most are reset quarterly and change according to standard deviation and bond duration.
The firm worked with a not-for-profit health-care provider consulting firm -- Highland Associates Inc., Birmingham, Ala. -- in developing the product. The pilot program was implemented at Alliant Health System, Louisville, Ky. and Scottsdale Healthcare, Scottsdale, Ariz.
"This came along at just the right time," said Randy Luster, chief financial officer of Scottsdale Healthcare.
At the time the hospital was first considering changes in allocation in late 1996, Mr. Luster was looking for a way to gain higher yields and higher returns with no increased risk. The hospital incorporated the Hospital PRO in its new asset mix, which included U.S. equity and international equity for the first time. Previously, the hospital invested exclusively in U.S. Treasuries. The $120 million investment pool has $34 million in the Hospital PRO.
The fund has achieved a 6% return with the Hospital PRO. Scottsdale chose the contract instead of an institutional bond manager mainly to decrease the amount of risk in the overall portfolio.
In addition, Southeast Alabama Medical Center, Dothan, Ala., soon will be using Hospital PRO. The center has a $65 million investment pool. The amount that will be placed in the Hospital PRO has yet to be determined. Funding will come from a reallocation of assets.
DFP already manages $22 billion in GICs, $14 billion in synthetics, for 401(k) plans, defined benefit plans, money market funds.