NZ has entered the catastrophe bond issuer market for the first time following a $225 million placement by Toka Tū Ake EQC in a move flagged last October.
Previously known as the NZ Earthquake Commission, the EQC will use the $225 million ‘cat bond’ proceeds to diversify its reinsurance funding lines that have increased in total to $8.2 billion.
“This is the first ever cat bond issuance by a New Zealand entity, the first ever issued in New Zealand dollars and covers all of the perils under the EQC scheme (earthquake, volcano, tsunami, natural landslip, hydrothermal activity and land damage from storm and flood),” an EQC spokesperson said.
“We are extremely pleased with the support we have received from the insurance linked securities market for this truly ground-breaking transaction. We were initially seeking up to NZ$250 million, so at NZ$225 million we are 90 percent subscribed.”
Under the arrangement, the EQC cat bond assets will be held via a Singapore-based special purpose vehicle dubbed Totara Re, paying out an annual spread of 8.75 per cent above low-risk rate benchmarks, according to niche Bermuda-based publishing venture, Artemis.
Artemis says the EQC cat bond price came in at the “top-end” of guidance with an estimated 3.66 per cent chance investors will have to pay out during the four-year term of cover, copping initial ‘expected losses’ of 3.42 per cent.
Year-to-date average spreads for similar insurance-linked securities (ILS) sit at just under 8 per cent, Artemis data shows, with expected loss risk of 1.83 per cent.
EQC carries the can for the first $2 billion of losses following a natural disaster event in NZ with the cat bond assets covering costs above this threshold up to the maximum $225 million in the Totara vehicle.
The NZ fund has “turned to Singapore for the issuance, presumably benefiting from the countries [insurance-linked securities] ILS grant program to help lower the costs of this first deal”, Artemis says. Typically, most ILS vehicles are domiciled in the Cayman Islands and the like.
According to the EQC spokesperson: “The issuance was well supported by a wide range of existing institutions operating in the insurance linked securities market. Most of these institutions are new relationships for Toka Tū Ake EQC and help to broaden and diversify our sources of reinsurance capital.”
Noah Schiltknecht, co-founder of investment consulting firm Makao Investments, said the NZ-first cat bond issue marked a positive development for the country.
Schiltknecht has some experience structuring cat bonds in a role with former employer, Swiss Re.
“It is great to see that the EQC now has access to a different form of reinsurance protection for the benefit of New Zealanders,” he said. “Global cat bond investors will likely welcome the diversification that exposure to New Zealand brings to their portfolios as well, as the cat bond market is often skewed towards exposures in the United States, in particular tropical cyclones.”
In a statement EQC chief, Tina Mitchell, said the cat bond offers the benefit of multi-year coverage compared to traditional reinsurance contracts that must be renewed annually.
“It is important that we have a diverse portfolio for risk transfer,” Mitchell said. “By exploring catastrophe bonds now, we can access other reinsurance arrangements to complement the long relationships we have had with traditional reinsurers. This gives Toka Tū Ake EQC more options in the future, in terms of new risk capital markets and the duration of the contracts.”
Legal firm Minter Ellison Rudd Watts advised the EQC on the cat bond structure.
Prior to the 2011 Christchurch earthquake, the EQC Natural Disaster Fund (NDF) held more than $6 billion in a diversified investment portfolio, which was drained to zero to cover subsequent costs.
The NDF currently stands at $370 million, the EQC spokesperson said, with any losses “balanced by the incoming premiums we receive”.
NZ government accounts as at March 2023 show an EQC provision of $700 million “for insurance expenses” associated with flood damage that decimated parts of the North Island earlier this year.