Publications
Annual Report
2002-2003
Chairman's Report
In the year under review, EQC produced an outstanding investment return for an unhedged balanced fund, of 6.8 percent.
The Natural Disaster Fund grew to $4.316 billion, an increase of $279.8 million for the year. The Fund has grown by over $1 billion during the six years that I have served on the Board.
The Board’s fundamental objectives for investment were set out in my report last year, and they are:
(a) The availability of the Fund to meet claims;
(b) Diversification;
(c) Improving the real value of the Fund over the medium term.
An explanation of the logic that led to the formulation of these objectives may assist with understanding of EQC’s investment strategy.
This is particularly important given the media interest in offshore investment by Crown organisations over the past two years. During that time the New Zealand dollar, Government securities and global equity markets have been very volatile.
EQC’s investment objectives flow from the purpose for which the Natural Disaster Fund exists. That is, in the event of a natural disaster, to meet the fi rst loss claims for the repair of homes that are insured under the Earthquake Commission scheme - in total about 1.4 million properties.
It is a case of form following function.
The first requirement of any disaster fund investment strategy is liquidity – the ability to sell the investments to meet claims – bearing in mind that it could take up to two years to process all the claims arising from a massive disaster.
Commonsense suggests that, as far as possible, the investments should be in highly liquid markets away from the point of risk. Hence, the Commission’s strategy to invest 30 percent of the Fund into offshore equity markets - a conservative asset allocation.
Offshore markets will not be affected by the multi-billion dollar cost of a major New Zealand disaster, one of the reasons for the second objective - diversification. Another reason for diversification is that there is little correlation between New Zealand Government securities and unhedged offshore equities. They move in different directions, therefore giving a better chance of improving portfolio value overall.
EQC’s third objective and a statutory requirement is “to maintain the value of the Fund”. Research indicates it is difficult to maintain the value, i.e. real value after inflation, of any fund over the medium term, without some investment in growth assets. That is the primary rationale for EQC investing in equity markets as an asset class, and a primary rationale for New Zealanders investing a major proportion of their personal assets in the homes that EQC insures. The year’s accounts are “a financial snapshot” of EQC at the close of business on 30 June 2003. They are prepared in accordance with current accountancy standards and investment assets are marked to market not just on one day but exactly at the close of business on one day.
It is the nature of the marketplace to deliver huge variations in unrealised gains and losses on a marked to market, day-to-day basis.
Even though trends are likely to be positive on a medium-term horizon, intra-month swings of around $100 million either way are possible. Consequently the annual results are affected by the arbitrary point on the swing cycles of each market that coincides with 30 June each year.
Note 3 to the accounts shows the results for each market - a very strong performance in New Zealand Government securities, a small positive return in overseas equity markets (including dividends), and substantial unrealised currency losses as the New Zealand dollar continued to rise during the year.
Conversely, the results for the two months since balance date show losses in the New Zealand Government securities market of $76.1 million, profi ts in the offshore equity market of $53.6 million and the currency has been virtually neutral. The swings will continue. The acid test of the real value of the Fund will come in the days following a massive natural disaster - the time, place and severity of which are utterly unpredictable.
Steady progress was made in the Commission’s partnership and strategic alliance programme during the year. Our partnership with Te Papa was renewed, the GeoNet project with GNS to install a modern hazard monitoring network is well advanced, and our catastrophe response programme - the planning required to meet the wave of claims after a major disaster - is growing in capacity and skill levels. David Middleton’s report expands on this activity.
Pip Dunphy retired from the Board on April 4 after nine years with the Commission. She made an outstanding contribution to EQC, in particular to the development of its investment strategy. The Board extends its sincere thanks to Pip and wishes her well.
All board members and staff of EQC have put a lot of effort into developing and implementing the Commission’s strategy and are to be congratulated on the results. The Commission as a whole wishes to record its appreciation for the interest and support that its Minister, the Hon Dr Michael Cullen, has given during a testing year.
Neville Young
Chairman
