NZ EQC’s first cat bond helps lift reinsurance tower to $8.2bn

Toka Tū Ake EQC, or the New Zealand Earthquake Commission, has lifted the top of its reinsurance tower to a new high of $8.2 billion at this years renewal, with the addition of its first Totara Re 2023-1 catastrophe bond helping it diversify its sources of protection.

With catastrophe bonds featuring for the first time, the EQC’s reinsurance program has increased significantly again at this renewal, as the Crown Entity insurer need to secure additional protection given the rising EQC building cover cap.

“We are extremely proud the global reputation of our scheme, and the science we invest in, has enabled us to secure significant reinsurance cover for major events,” Toka Tū Ake EQC Chief Executive Tina Mitchell explained.

“We have been able to increase our reinsurance cover for the year ahead despite the reinsurance market hardening. Global markets have experienced considerable losses over the past five years from a range of hurricanes, typhoons, floods, storms and wildfires, alongside the Covid pandemic and the war in Ukraine,” Mitchell continued.

Mitchell said that Toka Tū Ake EQC ventured into the catastrophe bond market for the first time as a way to expand and diversify its sources for risk capital, further protecting the Crown balance sheet.

Mitchell added that, while the catastrophe bond is relatively small, at NZ $225 million, in comparison to the overall reinsurance program’s $8.2 billion of limits, she sees it as a significant step to secure long-term assurance for New Zealand homeowners.

“It is important that we have a diverse portfolio for risk transfer. 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,” Mitchell further explained.

Mitchell also noted the benefits of multi-year coverage from the catastrophe bond market, compared to the traditional reinsurance which has only been annual in its nature through recent years, given the change to the EQC building cover cap.

The EQC’s cap limit on building cover has risen significantly in recent years, effectively increasing the amount of exposure it holds and driving a need for additional reinsurance at renewals in recent years

Mitchell added, “The most important element in all considerations is that any additional or alternative source of risk capital comes from high quality sources, makes economic sense, complements our core reinsurance programme and demonstrates value for money for levy payers.

“With the catastrophe bond in place, Toka Tū Ake EQC now has another form of protection, to sit alongside and complement the traditional reinsurance contracts we secure annually.”

The reinsurance protection tower attaches after $2 billion of losses to the EQC, before which any EQCover claims are funded by New Zealand’s Natural Disaster Fund (NDF) and a Crown Guarantee that Toka Tū Ake EQC can access once the NDF has been exhausted.

The EQC said that it has been “really well supported by a number of advisors across our traditional reinsurance programme and the catastrophe bond transaction.”

The EQC’s CEO Mitchell has been deeply engaged in conversations with with reinsurers and investors and said “she is proud of how well New Zealand is regarded in the reinsurance world,” despite the increased number of severe, and costly natural hazard events globally that have at least in part driven the hard reinsurance market environment.

“The global reinsurance industry recognises the world-leading work Toka Tū Ake EQC undertakes to understand and quantify natural hazard risks and the steps we are taking to reduce the impact of those hazards for New Zealanders,” Mitchell said.

You can read all about the NZ EQC’s Totara Re Pte. Ltd. (Series 2023-1) catastrophe bond and every other cat bond issuance since the market began in our extensive Deal Directory.