Southern Response satisfied existing Crown support will cover current liabilities

Wednesday 11th November 2015

Southern Response Earthquake Services, the Crown entity established to house AMI Insurance's earthquake liabilities, says existing Crown support of up to $1 billion will be enough to cover its current liabilities, and it is confident the government will stump up more funding if needed.

The Christchurch based Crown entity has started drawing down on two $500 million facilities provided by the government to first bailout AMI, and then to capital Southern Response once it had exhausted its investments and reinsurance. The company has drawn down $40 million so far, and sees the $1 billion as sufficient to cover its liabilities, which were valued at $1.1 billion as at June 30.

"We're really just moving into the Crown support money at this point in time and expect it to be sufficient to cover all of our current liabilities," chief executive Peter Rose told parliament's finance and expenditure committee.

Budget documents released earlier this year show the Treasury sees a substantial call on more capital as having a greater than 50 percent chance as the rising cost of quake claims pushes Southern Response's shareholder funds deeper into deficit. That deficit was $420.1 million as at June 30.

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 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.

Chief financial officer Tony Feaver told the committee the company's valuations of claims will fall within the current capital available, unless unexpected claims emerge or there are any blowouts but it was too early to say whether more funding would be needed.

The level of funding was constantly monitored by the board, and deputy chair Anne Urlwin said it considers the current level sufficient.

If that were to change due to additional claims or technical challenges, the board will engage with ministers on the form and level of additional support, Urlwin said.

Southern Response is 65 percent through its claims, and last month pushed out its target to settle 90 percent of claims by mid-2017.

Rose said the major challenges facing Southern Response included issues around land, multi-complex dwellings, and local insurance policies providing full replacement value cover rather than the international norm of sum insured.

The company has experienced fewer quality issues through the rebuild process than some of its peers, something Rose put down to a number of factors such as under-floor ROVER camera surveying, seeking of resource consents for all work, and the performance targets it has in place with project partner Arrow International (NZ).

Rose said an independent assessment report by KPMG said the contract with Arrow was providing Southern Response with value for money, though he said the results were comparable with other project management offices due to the different contract terms.

BusinessDesk.co.nz

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