Standard & Poor’s (S&P) has affirmed the New Zealand Earthquake Commission’s (EQC) AAA financial strength and issuer credit ratings, with a stable outlook.

The EQC’s ratings are the same as the New Zealand Government’s, reflecting S&P’s view that there is an “almost certain” likelihood of the government supporting the EQC in the event of financial stress.

“The EQC’s good stand-alone creditworthiness benefits from an entrenched and mandated competitive position, strong reinsurance support, and material capital resources,” Melbourne-based analyst Michael Vine said. He says this is “moderated to an extent by uncertainty around the EQC’s ultimate exposure in the event of additional major catastrophes”.

He says the EQC’s credit profile has deteriorated due to Canterbury earthquake claims. It held more than $NZ6 billion ($4.82 billion) before the September 2010 quake and S&P estimates this will fall to around $NZ2.5 billion ($2 billion), with net exposure to all the events of around $NZ3.5 billion ($2.8 billion). The EQC has $NZ2.5 billion reinsurance cover in place.

S&P says these funds may be insufficient to cover another major catastrophe, but it has retained a stable outlook on the EQC due to the support of the Government.

“While there is uncertainty as to the structure and capitalisation of the EQC going forward, we believe the EQC will remain very strongly supported by the Government,” Mr Vine said.

He told insuranceNEWS.com.au there are issues around reinsurance pricing uncertainty, with the EQC having to accept one-year contracts instead of its usual three-year terms from reinsurers. But he says this can work both ways as reinsurance buyers might not wish to lock into longer contracts when prices are high.

EQC CEO Ian Simpson says S&P’s decision to maintain the ratings “will give people confidence that the EQC can, and will, meet all its commitments around the Canterbury earthquakes”.

He confirmed the estimated $NZ3.5 billion total net cost will leave around $NZ2.5 billion in the Natural Disaster Fund as well as reinsurance of $NZ2.5 billion to fund future events.