Another mega-bill looms for taxpayer

Finance Minister Bill English. Photo / Mark Mitchell

The Government yesterday committed itself to what may prove to be yet another billion-dollar bailout by backing Christchurch-based AMI Insurance, which is at risk of being overwhelmed by quake-related claims.

The rescue package saddles the taxpayer with a potential liability in excess of $1 billion just days after the estimated bill for the South Canterbury Finance failure topped the same sum.

After weeks of speculation that AMI, New Zealand's second-largest general insurance company, may not be able to meet the cost of claims from the two Christchurch earthquakes, Finance Minister Bill English yesterday announced a "policy-holder support package" for the company.

The deal, said Mr English, was primarily intended to give certainty - both to AMI's 85,000 Christchurch policy holders and to 400,000 more across the rest of New Zealand - that the company could make good on any claims it received.

Although the Government has paid no money to the company as yet, and in fact has received a $15 million payment from AMI to secure the deal, Mr English yesterday acknowledged the Crown's potential liability could top $1 billion and leave it exposed to as much as $200 million a year in ongoing claims.

Yesterday at least two other insurance companies, including locally owned Tower, indicated they were interested in AMI which generates premium income of $320 million a year from its 485,000 policy holders.

"Whatever equity the Crown puts in, there is the possibility of recovery of that through potentially the sale of the business," Mr English said.

AMI has been hit particularly hard by the quake as it is the leading fire and general insurer in the city with 35 per cent of the market.

The company says it has about $1 billion in reserves and reinsurance cover it can use to pay out on quake claims but Mr English said estimates of the shortfall between those funds and total claims ranged from zero to $1 billion. An accurate assessment is still two months away.

"The upper limit of the liability will depend entirely on how many claims there are and the cost of those claims."

Yesterday's package means that if it is required, the Government will become the owner of the company.

Mr English said it was reluctant to do that 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."

Should the Government assume ownership of AMI it would also be liable to make good on the company's "business as usual" claims which Mr English said were running at about $100 million to $200 million a year.

"We are effectively underwriting that ongoing operation."

But the package would also give AMI the time to seek a commercial solution.

Tower chief executive Rob Flannagan last night confirmed his company was interested in buying AMI.

The Herald understands acquisition talks with AMI were taking place yesterday but Mr Flannagan said they did not involve Tower.

Mr English said although there would be the temptation to label the package as a "bailout" of a company, he stressed that as a "mutual" company, AMI had no shareholders.

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

The package found support from all of Parliament's parties.

GOVT BAILOUTS

South Canterbury Finance: Last year the South Island finance giant's failure triggered a call on the Crown's retail deposit guarantee which was estimated this week to have a net cost of $1.1 billion.

Air New Zealand: In 2001 the Government paid $885 million to prop up the failing national airline.

Bank of New Zealand: In 1990 the Crown rescued the BNZ by supporting a Fay Richwhite proposal. The rescue cost $720 million, with the Crown supplying $620 million and Fay Richwhite $100 million.

KiwiRail: In 2010 it was announced $250m from the Budget, and potentially an additional $500m the next two budgets, would go to KiwiRail as part of a 10 year turnaround plan after its value had decreased from $1 billion to $388 million.