“Complementary” first NZ EQC cat bond sets scene for future deals: Interview

Because the first catastrophe bond sponsored by the Toka Tū Ake EQC, or New Zealand Earthquake Commission, was structured to meet its Boards ambitions of being “complementary” to the rest of its reinsurance tower, it sets the scene for future issuances, EQC’s CEO and Head of Risk Financing told Artemis in an exclusive interview.

Speaking with us right before announcing the completion of its largest reinsurance tower yet, at $8.2 billion, the CEO and Head of Risk Financing of the NZ EQC explained that the catastrophe bond market experience has been a positive one for the New Zealand Crown entity and disaster insurance provider.

Tina Mitchell, CEO of Toka Tū Ake EQC, told us what triggered the EQC to venture into the capital markets for the first time.

“The prompt was really the fact that our cover has increased recently. So the residential building cap in New Zealand went from $150,000 plus GST to $300,000 plus GST, so that obviously grows our need for reinsurance and we could see that sooner or later, we would need to use some other products or alternative reinsurance and this year was really all about setting it up as a pilot,” Mitchell explained.

The EQC CEO continued, “Going out with the bond and learning all about it, seeing how that went. To then be able to plan that for the future, was the plan, as we imagine our programme will continue to grow.”

Adding that while the cap change was the primary driver, “We haven’t been immune to the impacts of global inflation as well, so all of those costs add up and the need for more capacity as a result.”

Clearly, for a Crown entity backed by the government and ultimately the public, there will have been a range of stakeholders to manage throughout the catastrophe bond planning and issuance process.

CEO Mitchell told us, “They’ve been very positive, successive Ministers have raised this with us as an opportunity we should explore and consider. So we discussed it last financial year, and then this financial year was the one where we decided to go ahead with it.

“So the board has been planning and discussing it and we’ve been doing the project for about seven months now.

“It’s always a bit slower the first time you do something, but we would expect that now we’ve got all our learning underway and our setup in place, it would be a lot quicker and more efficient next time.

“We’ve got strong government support as well, but we also recognise that the perils we’re getting reinsurance for are right at the top of the stack ( the NZ EQC buys reinsurance for remote, large catastrophe events). So, sharing the risk amongst a range of sources is always a good idea for the government.”

Scott McHardy, Head of Risk Financing at Toka Tū Ake EQC, told us that the ILS investment community was very supportive and accepting of specific features of the EQC reinsurance tower that it wanted to match with its first cat bond.

McHardy explained, “A good positive for us is that investors were happy to accept all of the perils we cover under the Act. That was one of the hurdles we had to get across right at the outset for the Board.

“The Board was very keen that it [the cat bond] was going to be a complementary product, that had to be complementary to our traditional product which covers all of the perils in the Act [the Earthquake Commission Act, 1993 and Natural Hazards Insurance Act, 2023 which comes into force on 1 July 2024], and investors got themselves comfortable with that which was incredibly satisfying and helps set the scene for future deals as well.”

Scott McHardy, Head of Risk Financing at Toka Tū Ake EQC will join us as a speaker at our upcoming ILS Asia 2023 conference in Singapore.

McHardy also noted that there are features of the catastrophe bond product that also provide additional benefits, one of those being the instruments term.

“The multi-year has been a massive plus for us, as far as the cat bond is concerned. We’re very pleased with that, multi-year cover is always part of the Board’s conversation [about the EQC’s overall risk finance strategy],” McHardy said.

Going forwards, while the cat bond is complementary, it could be market conditions that determine how frequently the EQC might revisit, but it clearly sees the benefit of layering multi-year cover within its program.

Mitchell also noted a positive investor response to the fact that, as a cat bond sponsor, the EQC can be viewed as diversifying for them.

“We had positive feedback from the capital market about the diversity of our programme and its location, which seems to fit in quite nicely with wider investor portfolios,” Mitchell stated.

The NZ EQC went to market with its debut catastrophe bond at the same time as it was in negotiations over the rest of its reinsurance tower.

CEO Mitchell told us that the traditional market responded positively to the fact the EQC was adding a cat bond to its program.

“We’ve got very long and strong relationships with our traditional reinsurance panel and we first started to talk to them about that in September, that we were thinking about a cat bond,” she said. “We took the soundings in September, and they were all very positive, understood why we would be doing that and the complementary nature of it. It has meant that we’ve been able to stretch our tower a bit because of it, which gives everybody a place to participate. So, they see it is a positive.”

Mitchell also said that, “We’ll take it year by year, as we always do depending on what the market does as we see the next lot of renewals go through. It’s great to have that experience under our belts now, to have the setup there if and when we need it, and it will just depend on market conditions from year to year.”

McHardy added that there were benefits to going to market with a cat bond at the same time as the traditional reinsurance.

“As we thought about pricing for the traditional programme, it was certainly helpful to have the cat bond in the market with pricing estimates,” McHardy explained.

Adding that, “For the traditional programme, we were able to benchmark our firm order terms against what we were seeing, or what we were seeking, in the cat bond market, and that gave the Board and ourselves a degree of confidence.

“That was certainly very helpful from a placement perspective on our traditional programme, getting that kind of internal comfort that we were in the right ballpark.”

The EQC has used Singapore as the domicile for issuance of its first NZ $225 million Totara Re Pte. Ltd. (Series 2023-1) catastrophe bond.

We asked what it was that attracted the EQC to Singapore as a cat bond domicile.

Mitchell said that, “We looked into both, Bermuda and Singapore and thought that they both had good regulatory environments.

“It really came down to the Singapore government and New Zealand governments had quite a long partnership in transparent information sharing anyway. So, we thought it was better to go with a long recognised partner.”

McHardy added that Singapore’s ILS Grant Scheme was not a sole driver.

“The ILS grant scheme wasn’t the [primary] driver for the decision in Singapore, it was very much around the depth of the relationship between New Zealand and Singapore,” McHardy said.

“Being in a relatively more favourable timezone also helps, as well as being in the region that we are a strong participant and advocate of, also helps with some of our broader “New Zealand, Inc.” goals in Asia Pacific,” he added.

As a reminder, Scott McHardy, Head of Risk Financing at Toka Tū Ake EQC will join us as a speaker at our upcoming ILS Asia 2023 conference in Singapore.

Discussing the experience of being a first time cat bond sponsor, overall Toka Tū Ake EQC CEO Tina Mitchell felt it had been a good one.

“It’s been very positive. I feel we’ve been very well supported by all of our advisors. We have learned a lot in seven months, but you can only really learn it by doing it, so the journey from theory to reality has been strong and not only externally and globally, but also internally with our government stakeholders, our Board – all of those things.

“I’ve been really impressed by the market, the professionalism, all of the structures that are in place, and the openness of the ILS investors. It was all positives really,” she told Artemis.

On how ILS investors received the EQC as it brought a debut deal to market, Mitchell elaborated, “It was very positive, with the diversity of perils and location we were offering.

“In our roadshow we spoke quite a lot about our ESG offering and I think that was a strong factor in our favour as well.

“We’re not only providing insurance for today, but we’re looking to reduce the impacts for tomorrow, and that was seen as a really strong social purpose as well, which was good.”

McHardy added, “There are many new investors who have contributed to this, with the placement broadly syndicated, so from a diversification perspective that’s fantastic.

“Most of them are brand new to us for the programme, but even those that have not invested this time around have provided a lot of rich feedback.

“There’s probably a similar number of investors that have taken their time to learn about us, for us to either speak directly to them, or to have further conversations with the book runners.

“So, expanding the universe of people that know about us is a really, really positive thing for us, even if this time around they haven’t put down any capital.”

CEO Mitchell closed the interview by saying, “We’ve really valued the interest and the engagement that we’ve received. We feel really welcomed to the ILS market and equally so, continue to really value our traditional partners as well who I think have been very supportive.”

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.

As a reminder, Scott McHardy, Head of Risk Financing at Toka Tū Ake EQC will join us as a speaker at our upcoming ILS Asia 2023 conference in Singapore.