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Note 32: Canterbury Earthquakes

These consolidated financial statements include both revenue and expenses for the Government as well as the best estimate of the Government‘s significant assets and liabilities in relation to the earthquakes and aftershocks that have occurred in the Canterbury region. In addition, the Crown is spending money on a number of capital projects in the Canterbury region. These projects, when capitalised, form part of the Crown's property, plant and equipment balance.

Amounts recognised in the statement of financial performance (operating expenses) as well as capital expenditure incurred to date in respect of the Canterbury earthquakes were:

Note Actual
30 June
2015
$m
30 June
2014
$m
30 June
2013
$m
30 June
2012
$m
30 June
2011
$m
Total
to date
$m
EQC insurance claims a (444) (242) (107) 662 7,444 7,313
Local Infrastructure b 66 109 483 729 195 1,582
Land zoning c (1) 97 (8) 258 653 999
Southern Response support package d 325 124 (53) 156 355 907
Christchurch central city rebuild e 179 473 115 767
Crown assets f 335 96 28 12 471
Other earthquake costs g 129 249 17 96 413 904
Total Crown net earthquake costs 589 906 475 1,913 9,060 12,943
Gross earthquake expenses 904 918 815 2,823 13,574 19,034
Earthquake related revenue (eg, reinsurance) (315) (12) (340) (910) (4,514) (6,091)
Total Crown net earthquake costs 589 906 475 1,913 9,060 12,943
Operating and capital expenses  
Operating expenses (55) 326 266 1,900 9,060 11,497
Capital expenditure 644 580 209 13 1,446
Total Crown net earthquake costs 589 906 475 1,913 9,060 12,943

Overall, net earthquake costs in 2015 reflected a focus on the rebuild rather than recovery. As a result a number of capital projects are underway, including the central city rebuild.

The measurement of the Government's earthquake-related assets and liabilities contain a number of uncertainties. The largest and most complex valuations have been carried out by independent professional actuaries and represent a best estimate of the costs and income to be settled in the future. Such complex valuations need actuaries and other independent experts to make a number of assessments such as the number of outstanding claims, the amount of claims, the time expected to rebuild or repair damage property or infrastructure and making judgements over the escalation of costs due to building inflation in the Canterbury construction industry.

In particular, significant uncertainty continues to exist for EQC land claims where there has been severe land damage, because of a very complex land claims environment and the fact that relatively few land claims have been settled to date. As claims are settled and the reasonableness of assumptions is tested against emerging experience over time, the level of this uncertainty will reduce.

The significant assets and obligations where uncertainty exists are summarised in the following table.

Note 30 June
2015
$m
30 June
2014
$m

Canterbury earthquake-related obligations

 
EQC property damage liability a 2,741 4,441
Southern Response property damage liability d 1,216 1,434
Total insurance liabilities 3,957 5,875
Provision for Canterbury Red Zone support package 3 66
Provision for water infrastructure costs b 234 394
Other provisions 22 35
Total provisions 259 495
Inter-segment eliminations (336) (367)
Total Canterbury earthquake-related obligations 3,880 6,003
Canterbury earthquake-related receivables  
EQC reinsurance receivables 962 1,225
Southern Response reinsurance receivables 102 184
Total reinsurance receivables h 1,064 1,409
Red Zone insurance recoveries c 344 403
Other receivables 31 11
Total other receivables 375 414
Inter-segment eliminations (336) (367)
Total Canterbury earthquake-related receivables 1,103 1,456
Net Canterbury earthquake-related obligations 2,777 4,547

These results do not represent the total fiscal impact to the Government of the earthquakes, as some costs will not be determined until further decisions and actions on the recovery from the earthquakes are made. Instead they represent the costs to 30 June 2015, refer to note 29 for further information.

The costs outlined in this note also do not include the secondary impact on tax or other revenues as a result of the earthquakes.

The final costs of the Canterbury earthquakes may differ from these estimates.

a) Earthquake Commission (EQC) insurance claims

EQC's obligation (and reinsurance recoveries) in relation to the Canterbury earthquakes has been valued by an independent actuary (Melville Jessup Weaver) as at 30 June 2015. The actuary considered that overall the information and data supplied to Melville Jessup Weaver was adequate and appropriate for the purposes of their valuation.

The key sources of uncertainty in estimating the obligation are:

  • a complex land claims environment as policy, engineering and legal difficulties are worked through, and
  • complexity of the remaining dwelling claims and the expectation that some claims will need to be reopened to rectify outstanding issues.

Consequently there continues to be a degree of unavoidable uncertainty regarding the future claims costs. However, as dwelling claims continue to be settled and complex land settlements increase, the level of uncertainty will reduce as the valuation and its assumptions can be tested against the emerging claims experience.

During the 2014/15 financial year, a declaratory judgment requested by the Commission, enabled the Commission to confirmthe claim settlement methodology in regards to Increased Flooding Vulnerability (IFV) and provided guidance on determining the policy for settlement of Increased Liquefaction Vulnerability (ILV) claims. One of the key determinations from the declaratory judgment was that Diminution of Value (DOV) is a permitted settlement method for IFV and ILV as it best reflects the loss in particular situations.

While the declaratory judgement'sguidance around ILV and IFV claims subsequently helped to clarify the assumptions used to derive the outstanding claims liability reported, actual settlement may deviate as experience of applying the ILV and IFV policy emerges.

Other key areas of estimation risk relate to claims that have been incurred but not reported or claims where the estimates are considered insufficient. The volatility of these claims is partially mitigated by the maximum settlement amounts for dwellings and contents. However, claims in relation to residential land are not subject to a single monetary limit and are therefore subject to greater volatility.

These financial statements include a net EQC recovery of $444 million for the year ended 30 June 2015 relating to the Canterbury earthquakes (2014: $242 million net recovery). This net recovery represents a decrease in EQC's expected cost of settling its outstanding Canterbury earthquake claims. This decrease is due to an actuarial reassessment of previous years' outstanding claims taking into account better information regarding these claims.

30 June
2015
$m
30 June
2014
$m

Movement in Outstanding EQC Insurance Liability - Canterbury earthquakes

 
Opening balance 4,441 6,634
Net claims incurred/reassessed for the year (455) (368)
Claims paid out in the year (1,245) (1,825)
Closing outstanding EQC insurance liability - Canterbury earthquakes 2,741 4,441

During the year, $1.2 billion was paid out to settle claims (2014: $1.8 billion). This takes the total for settling approved claims to $8.8 billion, leaving an outstanding insurance liability estimate of $2.7 billion, some of which is expected to be offset by reinsurance proceeds.

b) Local infrastructure

In 2013, the Government entered into a cost sharing agreement with the Christchurch City Council (CCC) covering various items including the Crown contribution to three waters infrastructure (waste water, storm water and fresh water) response and rebuild costs and local roading. The agreement set out that the Government will contribute up to $1.8 billion to CCC for response costs and the recovery of Christchurch's essential infrastructure (water and roading). The cost sharing agreement allowed for an independent review of CCC's infrastructure recovery costs and programme with any costs of the rebuild work as the basis of any final discussions on horizontal infrastructure cost sharing. This review was carried out during the year. The agreement also acknowledges there is the possibility of unforeseen circumstances, so both parties can review the agreement in the future.

While best available information has been used to provide the estimate of water infrastructure recovery costs, significant uncertainties remain with regard to policy decisions on eligible expenditure, and the estimation of future eligible costs and validation of costs incurred to date.

The movement in the provision for water infrastructure costs during the year is set out below.

30 June
2015
$m
30 June
2014
$m

Movement in provision for Water Infrastructure costs

 
Opening provision 394 769
Provision used during the period (176) (391)
Unwind of discount rate and effect of changes in discount rate 16 16
Closing provision 234 394

While costs associated with water infrastructure are recognised upfront, the repair of local roadways is recognised in the year of repair, consistent with the approach taken to all subsidised local roading repairs. This spreading of costs reflects that the first call for funding these future expenses will be from dedicated ring-fenced revenue in the form of road user charges, fuel excise duties, and registration fees paid to the National Land Transport Fund.

The Government and New Zealand Transport Authority (NZTA) have agreed that up to $50 million a year will be made available from the National Land Transport Fund for repairs to Canterbury roads. NZTA have entered into a loan agreement with the Crown to fund the ongoing NZTA contribution above this amount over the next two years.

During the year, $50 million (2014: $93 million) was incurred for costs associated with the repair of local roadways taking the total costs of local roading repairs to date to $374 million.

c) Land zoning

On the 23 June 2011 the Government announced zones of land damage in Christchurch and parts of the Waimakariri district. This land was mapped into four zones, with “Red Zone” land identified as being unlikely to be suitable for continued residential occupation for a prolonged period of time. For this reason, the Government instigated a process for purchasing insured residential land in the Red Zone on a voluntary basis. Since the initial zoning announcement, further zoning announcements and other land zoning policy decisions were made.

Included within the land zoning costs for 30 June are both costs associated with the red zone support package, and expenses in relation to other land zoning related costs. Melville Jessup Weaver (a firm of consulting actuaries) was engaged to revalue the Crown's obligation and associated insurance recoveries for the red zone support package as at 30 June 2015. The net effect of the re-estimation of the red zone support package was a reversal of expenses of $31 million in the current year (2014: $73 million). The actuary has used the latest available data to prepare this valuation. The amount included is the best estimate using this data rather than a final cost. It is acknowledged that there have been limitations on the data available from insurers particularly in relation to land recoveries.

d) Southern Response Earthquake Services support package

On 7 April 2011 the Government provided a financial support package for AMI to give policyholders certainty and to ensure an orderly rebuild of Christchurch. The financial support to AMI was provided via a Crown Support Deed (CSD) under which the Crown subscribed for $500 million of convertible preference shares which were called but unpaid.

On 5 April 2012 IAG purchased the on-going insurance business of AMI. Immediately after completion of the sale, the Crown paid $100 million of the unpaid balance on the preference shares and took ownership of AMI's residual earthquake business. The earthquake business was renamed Southern Response Earthquake Services Limited (Southern Response).

Finity Consulting Pty Limited (the Appointed Actuary) has prepared the independent actuarial estimate of the Southern Response claims liability as at 30 June 2015. The actuary is satisfied with the nature, sufficiency and accuracy of the data used to determine the outstanding claims liability. The movement in Southern Response’s property damage liability is set out below:

30 June
2015
$m
30 June
2014
$m

Movement in Outstanding Southern Response Claims Liability

 
Opening balance 1,434 1,744
Net claims incurred/reassessed for the year - Canterbury earthquakes 334 87
Claims paid out in the year (552) (397)
Closing outstanding Southern Response claims liability 1,216 1,434

During the 2015 financial year $325 million of net expenses were recognised in relation to Southern Response support (2014: $124 million net expenses). Southern Response support costs include claims costs, net of insurance recoveries, plus the operating costs of the company.

The ultimate cost will be dependent on the financial performance of the company and the underlying emerging experience from the earthquake series such as further late notified claims in relation to the liability (and resulting reinsurance recoveries) arising from the Canterbury earthquakes. The uncertainties regarding Southern Response's outstanding claims liability are similar to those of EQC (with the exception of risks associated with land claims).

e) Christchurch Central City Rebuild

The Government has agreed to contribute to certain Anchor Projects in the Christchurch central business district. During the year ended 30 June 2015, $179 million (2014: $473 million) has been recognised relating to both capital and operating costs for these projects. Of these projects, the Bus Interchange is the most significant in the current year and was substantially complete at 30 June 2015.

f) Crown assets

Costs associated with Crown assets were $335 million (2014: $96 million) and include capital expenditure on Canterbury hospitals, the University of Canterbury and Lincoln University, the Justice and Emergency Services Precinct, Canterbury schools, and housing.

g) Other earthquake costs

Other costs represent various other initiatives raised in support of Canterbury. The 2015 net cost includes the operating costs of the Canterbury Earthquake Recovery Authority (CERA), net operating and capital expenses incurred by Crown entities other than EQC, state highway repairs.

h) Reinsurance receivables

Associated with both EQC and Southern Response's insurance liabilities are reinsurance receivables. The movement in the Crown's total reinsurance receivable balance is set out below.

30 June
2015
$m
30 June
2014
$m

Reinsurance receivables

 
Opening balance 1,409 3,135
Reinsurance recognised/reassessed during the year (25) (160)
Reinsurance received during the year (320) (1,566)
Closing balance 1,064 1,409
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