AMI rescue plan could top $1b - Govt

The Government is closely watching AMI Insurance which reportedly has had its $1 billion of capital and reinsurance cover wiped out. Photo / Dean Purcell

New Zealand's government has announced a support package for AMI Insurance that Finance Minister Bill English acknowledges could top $1 billion and leave the Crown liable for up to $200 million a year in ongoing claims.

AMI, the largest general insurer in quake hit Christchurch may face a shortfall between its available funds and reinsurance cover and the cost of claims from the two recent earthquakes and has been working on the problem with Government since early last month.

English this morning unveiled a "back up financial support package" for AMI Insurance which commits an initial $500 million of funds to the company to meet any shortfall, although he acknowledged the potential bill could be twice that or more.

The support package - which would see the Government become the effective owner of New Zeland's second largest general insurer - would only be called on as a last resort if AMI's own reserves have been exhausted - "unless the Crown believes it is in the public interest to take control sooner."

English said the Government was reluctant to become involved in the insurance market but "cannot leave Christchurch homeowners in the lurch".

"The prospect... of having a third of the homeowners in Christchurch not knowing whether their claim would be met for a period of two or three years would paralyse the Christchurch recovery effort... New Zealand can't afford that."

In Christchurch alone the company has more than 85,000 policyholders with 225,000 policies - or about 35 per cent of the residential insurance market in the city.

The package would also give AMI the time to seek a market solution to the challenges it faces as a result of the two Canterbury earthquakes," said English.

"Whatever equity the Crown puts in, there is the possibility of recovery of that through potentially the sale of the business, bearing in mind that outside of Christchurch there are another 400,000 policy holders," English said.

English said there should be non uncertainty as to the intent of the package, which was to ensure that "all claims can be met".

"The upper limit of the liability will depend entirely on how many claims there are and the cost of those claims... At the moment we can't be certain what that cost is."

Estimates of the shortfall between AMI's existing funds of about $1 billion and total claims from the Christchurch quake ranged from zero to $1 billion said English.

He said it was possible the Government could end up paying out $1 billion if that upper estimate of the shortfall proved correct.

However, given the package means the Government would become the owner of New Zealand's second largest general insurer which had run out funds, it would also be liable make good on the company's "business as usual" claims which English said were running at about $100 million to $200 million a year.

"We are effectively underwriting though that ongoing operation."

English said while there would be the temptation to label the package as a "bail out" of a company, he stressed there were no shareholders.

"The only people who will benefit from Government support are policy holders because the company is completely owned by the policy holders."

"There are no depositors, no shareholders, no one who doesn't own a policy with AMI will benefit from this package."

Meawhile opposition parties fell in behind the the package.

Labour leader Phil Goff said his party supported it but with some concerns.

"The wellbeing of Cantabrians and their ability to rebuild their homes and lives must not be put at risk because of financial uncertainty surrounding the country's second largest insurer," he said.

However, he said the package should only be backstop.

The Government needed to ensure there were safeguards in place to protect the long-term interests of taxpayers who were "sick and tired of bailing out the private sector" including finance companies, he said.

Green Party co-leader Russel Norman said his party suported the certainty the package gave to homeowners in Christchurch and elsewhere.

The model employed by the Government was "the most prudent way to bail out the company and will ensure the interests of taxpayers are best protected".

However, the package would put the Government's books under even greater pressure, "making the need for an earthquake levy more compelling".

A report earlier today said that it was feared AMI would not be able to afford to pay out on new insurance claims if it could not raise extra money.

AMI is the biggest insurer in Christchurch covering a third of all homes, contents and motor vehicles.

It was understood it probably had enough money to pay out all its existing earthquake claims.

Sources told Fairfax Media there was little or no money left to cover new claims either from earthquake victims or any other customers in other parts of the country, and that the Government had come to some arrangement to allow the company to continue trading.

A rescue package could involve the Government offering to underwrite or guarantee a capital raising and allow AMI to buy more reinsurance cover to meet future claims.

AMI looking at capital options

Earlier this month AMI said it was looking at options to raise money to help pay claims from the February 22 earthquake. As a mutual owned by its policyholders, AMI does not have shareholders or other investors it can go to for funding.

AMI had $600 million of reinsurance cover for the February quake and about $500m in cash and investments.