AMI rescue plan could top $1b

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 could face claims costs of as much as $1 billion though the scale remains unclear, Finance Minister Bill English said today, after announcing support of up to $500 million for AMI Insurance.

The Government has unveiled what it calls "a $500m back up financial support package" for AMI Insurance to give policyholders certainty and to "ensure an orderly rebuild of Christchurch in the aftermath of the two earthquakes."

Finance Minister Bill English said the support package 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."

It was possible the Government would have to double the package, should AMI find itself $1 billion short in meeting its claims.

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

He said if other insurers wanted Government support, they would need to realise it would come at a hefty price.
In the case of AMI, it was a $15 million payment up front, and the risk of losing control and ownership of the company.


Read the full release here.

If the package is called on, it would involve the Government investing up to $500 million of equity in AMI, with the right to take ownership and assume control of the company if it needs to.

Without the package, there was potential for a "chaotic situation in Christchurch which would be very damaging for the policy holders themselves", but also for the rebuild of Christchurch.

"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.

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

"While the Crown enters this kind of arrangement reluctantly, the alternative would have been a good deal of uncertainty in the insurance market and Christchurch."

"It could have left policy holders with their houses destroyed without insurance cover or without the financial resources they need to rebuild."

The Government had made it clear that helping to rebuild Christchurch was one of its most important priorities, said English.

He said AMI approached the Government on 9 March, concerned that its reserves and reinsurance might not be sufficient to cover the total value of claims resulting from the Canterbury earthquakes.

"Since then, officials have been working closely with the company to gather information about what are complex issues and to consider the best option for taxpayers and AMI's policyholders.

"It was the Government's judgement that a support package was necessary to give certainty to policyholders that their claims will be covered. This applies to all AMI policyholders - not just those in Christchurch.

"Because of uncertainty around the cost of earthquake damage, it is too early to tell whether AMI will have sufficient resources to cover all of these claims. The full extent of the claims AMI faces will remain unclear for several months.

"Ministers have decided to act now. This provides a financial backstop for policyholders so the rebuilding of Christchurch is not jeopardised by potential solvency or liquidity issues and so confidence is maintained in the insurance sector.

"AMI has confirmed it will seek an alternative commercial arrangement to replace the Government's support facility as soon as possible. The Government's actions give the company time to do that.

English said this was "an unusual situation requiring a special response."

The Government had been closely watching AMI Insurance which has had reportedly had its $1 billion of capital and reinsurance cover wiped out by the two Canterbury earthquakes.

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."

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.

AMI chief executive John Balmforth, said just after the February earthquake that it was the worst disaster his firm had faced.

"We have not had events of this magnitude before, he said in late February. "But we had $600 million reinsurance for the first event and we have another tranche of $600 million we can draw down on and another tranche of $400 millon we can draw down on," he said.

He said AMI "had no issues meeting its commitments" but he predicted insurance costs will rise.

"There will be increases in premiums nationally. I think these will be across the board, that's just going to be a flow-on effect," Balmforth said.

New Zealand companies offered more affordable insurance than in many other parts of the world.

Balmforth said AMI was backed by some of the largest international reinsurers based in Bermuda and other parts of the world. Claims would be met.

"I'm completely confident we can cover this. I've had messages from reinsurers offering support and saying they are ready to assist."

- with Paul Harper / Susie Nordqvist / BusinessDesk / NZPA