After the September quake, Peter Cresswell pointed to some worries about the New Zealand Earthquake Commission (EQC)'s balance sheet.* Specifically, it's heavily invested in New Zealand domestic assets, mostly government securities. I checked the 2008/2009 annual report - about two thirds of its asset base consisted of government securities. This seemed a pretty odd way of setting things up. A big earthquake hits, and folks are going to start demanding a risk premium on New Zealand government securities. That means their value drops at the same time as EQC has to offload a pile of them to pay out claims. I'm not a finance guy. Maybe there's some high tech fancy finance reason why this is a fantastically good idea. But it seemed then and still seems remarkably silly.
I've now checked the 2009/2010 annual report, which was signed off before the September quake but not published 'till after I'd posted in September. As of then, just over 69% of the asset base was in government securities.
The dollar dropped more than a cent right after the quake. If EQC had been heavily invested in foreign securities, that would have been a good time to ditch some of those assets and buy cheap New Zealand dollars. Instead, it's going to have to sell domestic assets in a buyer's market.
I hope that EQC adjusted its portfolio subsequent to the September quake.
Seamus had proposed a tidy solution: if politics means that EQC has to ignore financial sensibility and invest domestically, then at least it could invest in earthquake countercyclical assets. Construction companies would presumably fare well, relatively speaking, after a natural disaster. That recommendation probably needs some work - Fletcher Building is up overall, but not particularly in response to the February earthquake. Total market capitalization of the building sector is down since the September quake.
Maybe one of our future Finance honours students can mine through NZX data to build portfolios of earthquake countercyclical stocks. We now have two decent events.
First best remains having the whole thing invested overseas.
* For overseas readers, here's the two minute summary of the EQC. If you buy property insurance, as a homeowner, you pay a small levy on top of your normal premium for natural disaster insurance. The Earthquake Commission - a government agency - then takes on the first $100,000 of property and the first $20,000 of contents damage in the case of a natural disaster. The premium is not risk adjusted: $0.05 per $100 in value insured to a maximum premium of $67.50 for a maximum of $100K in property and $20K in contents insurance. We'll see what's left in the kitty after these two events.
