Canterbury Earthquakes

The impact on the OBEGAL consisted of $2.8 billion of expenses, partly offset by revenue (mostly insurance proceeds) of $0.9 billion.

These results bring the Crown's total earthquake-related costs to $11.0 billion so far. However, this cost does not represent the expected final cost to the Crown of the earthquakes. Some additional costs are yet to be incurred, or will not be determined until policy decisions are made, such as how best to reinstate health and education assets in the region.

Also, these results do not include the impact of recent announcements regarding the Christchurch Central Recovery Plan, the Port Hills and zoning reviews as the announcements were made after 30 June 2012. Information on these announcements can be found in note 35 of these financial statements.

A large proportion of the costs are based on estimates, such as the cost of EQC's outstanding insurance claims and the Crown's share of costs for restoring local authority infrastructure. This means the actual cost of the earthquakes will emerge over the next few years as future decisions are made and as cost estimates are refined.

The major components of the $1.9 billion of net costs recorded in 2011/12 were:

• EQC insurance costs (net of reinsurance) of $662 million (2011: $7.5 billion). This year's costs were driven by claims arising from the 23 December 2011 earthquake, as well as a revaluation of outstanding claims relating to the previous year.
• An initial estimate of the Crown's share of costs for restoring local authority infrastructure of $554 million. Last year, this obligation was recorded as a contingent liability, as the amount could not be quantified with sufficient reliability at the time. In addition, and in accordance with the Civil Defence Emergency Management (CDEM) Plan, other support was also provided to local authorities costing $89 million (2011: $133 million). These costs total $643 million this year.
• The purchase of further residential properties in the Red Zone $258 million (2011: $653 million). This year's costs were driven by further offers made to Red Zone property owners during the year, as well as a reassessment of the outstanding offers relating to the previous year. This figure is net of expected insurance recoveries, and
• The Southern Response (formerly AMI) support package $156 million (2011: $355 million). This reflects an increase in the expected cost to the Crown of outstanding insurance liability, less the proceeds from the sale of AMI's ongoing business to IAG on 5 April 2012. While the potential cost of the Crown's support has been estimated at $511 million in total, which includes a risk margin, the ultimate cost is dependent on the financial performance of the company in relation to the liability (and resulting reinsurance recoveries) arising from the Canterbury earthquakes.

Further explanation of the fiscal impact of the earthquakes is provided in Note 30 of these financial statements.

EQC has recorded total insurance expenses of $12.6 billion in the last two financial years. Some of these expenses ($4.5 billion) will be met by reinsurers. The majority of the remaining costs are likely to be met by the National Disaster Fund which held around $6 billion prior to the September earthquake. Support will be provided by the Government in the event a shortfall arises in the Fund to ensure that EQC can meet claims.

Canterbury Earthquake Recovery Fund

In the 2011 Budget the Government established the Canterbury Earthquake Recovery Fund (the “Fund”) to provide for the core Crown's share of costs arising from the earthquakes.

In the 2012 Budget, the total (net) cost of the Fund was forecast to be $5.5 billion, spread over several years, with $0.8 billion of that expected to be incurred in 2011/12. However, the actual cost recorded this year was $1.3 billion (refer table 12), taking the total cost over the last two years to $2.9 billion (as shown in table 11).

As the Fund was established to record core Crown costs, it excludes costs incurred by EQC and other Crown entities as they are not part of the core Crown reporting segment.

The reason actual costs exceeded the forecast during the year was primarily due to timing. The forecast assumed that the Crown's obligation for a share of local authority infrastructure repair costs would not be quantified until the 2012/13 year. However, the Canterbury Earthquake Recovery Authority (CERA) was able to estimate these costs with sufficient reliability to include them in this year's results.

Debt Impact

While the operating deficits of the last two financial years have been affected by costs associated with the earthquakes, the impact on cash (and net core Crown debt) has not yet been fully realised.

While a number of expenses have been recorded which represent obligations for the Crown as at 30 June 2012, the cash payments associated with some of those obligations will not be made until a later point in time. Therefore, the full impact on the Crown's level of debt is not likely to be felt for a number of years, until all claims are settled and the rebuild in Christchurch takes place.

Approximately $4.3 billion (2011: $1.7 billion) in cash was paid out on earthquake-related costs during the year, however, the majority of these were insurance claim payments by EQC, $2.8 billion (2011: $1.2 billion) and were funded by the National Disaster Fund rather than by an increase in net core Crown debt.

Future Decisions

As noted above, there are still a number of decisions to be made regarding the nature of the reconstruction and rebuild in Canterbury. These decisions are likely to result in costs in future periods, and these will be recognised at the time they are incurred.

Judgements and Estimations

All financial statements include an element of judgement and estimation. The estimation of claims and provisions arising from the Canterbury earthquakes are key areas of judgement in these financial statements.

Cost estimates have been based on the information available at the time of preparing these financial statements. The largest and most complex valuations have been carried out by independent professional actuaries and represent a best estimate of the costs to date. However the final costs of the Canterbury earthquakes will not be certain for some time and these estimates may differ from those final costs.