Southern Response to call on $500m backstop as quake claims mount

Budget documents show the Treasury thinks it more than likely that Southern Response will need to make a call on additional capital provided under its Crown Support deed.

Southern Response Earthquake Services, the Crown entity established to house AMI Insurance's earthquake liabilities, will get $500 million of uncalled capital from the government as the rising cost of quake claims pushes its shareholder funds deeper into deficit.

Budget documents released yesterday show the Treasury thinks it more than likely that Southern Response will need to make a call on additional capital provided under its Crown Support deed, and advised the finance and earthquake recovery ministers to make the full $500 million kitty available. Independent actuary Finity Consulting increased its estimate for Southern Response's insurance liabilities by $328 million to $2.69 billion, almost half of which fell in the first three months of 2015, the April 17 Treasury report said. That left the Crown entity with a shareholders' fund deficit of $399 million before calls on the uncalled capital, compared to a shortfall of $112 million as at June 30, 2014.

"In light of recent developments, the Treasury considers that the probability that SRES will need to make substantial calls on the uncalled capital is higher than 50%," the report said.

The government agreed to take on the former AMI liabilities as part of the bailout of the insurer that freed up Insurance Australia Group, whose brands include State and NZI, to buy the 'good' parts of the AMI for $380 million in 2012. The Crown committed to providing additional support if Southern Response exhausted its investments, reinsurance and earlier government injections to the tune of $500 million, which it viewed at the time as having a low probability.

Southern Response had a book value of negative $110.7 million in the 2014 financial year, according to budget estimates released in May, with that deficit forecast to rise to $393.4 million in the 2015 year, before improving to a deficit of $349.4 million in 2016.

The appropriation would hit the 2015 financial year and needed approval before the budget moratorium on April 20, 2015, with $300 million recognised as an immediate impairment charge although, because Southern Response is consolidated into the Crown accounts, that would hit the government's operating balance. An extra $5 million charge was expected due to lower interest rates pushing up its long-term costs.

The Treasury recommended the capital not be counted against the Future Investment Fund, which houses the proceeds from the Crown's partial privatisation programme, saying it would be immediately impaired.

The appropriations were exempted from end-of-year performance information requirements under the Public Finance Act "as additional performance information is unlikely to be informative because the capital appropriation is solely to invest in Southern Response Earthquake Services Ltd in accordance with the Crown Settlement Deed and the operating appropriation is to reflect technical accounting treatment."

The Crown judged Southern Response's insurance liabilities to be $1.24 billion as at May 31 in its latest set of accounts, released this week.

Southern Response's latest statement of intent valued gross claims at $2.51 billion in March, with project management costs of $186 million.

"The total gross claims cost and management costs have continued to increase, with progressive actuarial valuations of the earthquake liability as more information on damage assessments and the impact of emerging issues such as foundation requirements and land damage become available and the apportionment of claims between the various earthquake events is finalised," Southern Response said. "They also reflect the increasing claim numbers and a longer than initially anticipated timeframe for the claims settlement and the resultant staffing needs."

Southern Response forecast conversions of Crown preference shares totalling $182 million in the 2016 financial year and $218 million the following year, drawing down $242 million of the previously uncalled capital in 2017 and $177 million in 2018.