Quake-hit AMI insurance bailout could cost $1 billion

MARTA STEEMAN

Last updated 17:40 07/04/2011

 

The Government announced today it would make $500m available to troubled Christchurch insurer AMI.

The Government had indicated it may have to inject up to $1b into AMI to help cover claims for the February 22, 6.3 magnitude earthquake.

AMI has confirmed it has greater claims cost than it is covered by reinsurance.

AMI chief executive John Balmforth said the company had so far received 12,000 claims with an estimated cost of $664m for the earthquake.

Its reinsurance cover for the second quake is $600m.

''It's a question of how many claims are still outstanding going forward,'' Balmforth said.

''We would hope most of the claims are in but they do take time.''

Balmforth said AMI had not yet spent the estimated $664m of cost from the received claims for February 22. Settling them would take a couple of years.

The big uncertainty over cost was whether land had to be remediated.

The February quake also meant that some houses that were to be repaired after September 4 now might have to be rebuilt at a greater cost.

''That will determine if we will need additional capital.''

AMI is New Zealand's second-largest residential insurer, with 485,000 policyholders and 1.2 million policies across the country.

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

The company had been able to handle the volume of claims from the September 4, 7.1 magnitude quake and was well covered by reinsurance for that.

It had received 14,000 claims at an estimated cost of $450m for the September quake with those covered by $600m in reinsurance.

Balmforth said he had received only one approach from a competitor to buy AMI Insurance.

He did not name the company, but listed New Zealand insurer Tower has signalled its interest in acquiring AMI.

"It's too early for us to comment, other than we would be interested [in a deal]," said Tower group managing director Rob Flannagan.

"Their business is very compatible with ours, and in many ways there would be a lot of upside in my view. I have spoken to the [AMI] chief executive [John Balmforth] earlier this week, but they are choosing to go a different path at the moment."

BAILOUT WELCOME

AMI Insurance says it is very grateful to the Government, which has offered a bailout for the troubled insurer.

"An accurate estimate on the final financial commitments for the second quake are probably still a couple of months away. There are simply too many unknowns at this stage," said Balmforth.

"Uncertainty about the final claims tally has translated into uncertainty about AMI's ability to pay. We could not allow such concerns to mount and it was for this reason that we asked Government to stand behind us during this difficult period.

"We are very grateful that they have done so."

Finance Minister Bill English said the Government would invest the equity into AMI, with the right to take ownership and assume control if needed.

"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," English said.

The Government could elect to take control of the company at any time with the payment of $100m.

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

"That is what today's announcement is about: providing certainty for AMI's tens of thousands of policyholders in the aftermath of the two earthquakes and ensuring the rebuilding of Christchurch and the insurance claims process proceeds in an orderly manner."

He said AMI approached the Government on March 9 with concerns that its reserves and reinsurance might not be sufficient to cover the total value of claims resulting from the September and February 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," English said.

This was a unique situation, he said.

"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."

English said this was not a company bailout because there were no shareholders in AMI. The policyholders were the owners and the only ones who would benefit, he said.

The Government would appoint a director and advisers to AMI to monitor it.

"At some stage we will need to go back and have a look at whether the company was run prudently," English said. He added that there was nothing to currently suggest it had not.

The Government was not in talks with any other insurance companies.

GOFF: 'ONLY DECISION POSSIBLE'

Labour leader Phil Goff said the Government made the only decision possible.

"You cannot leave policy holders in Christchurch without the certainty that their claims can be paid and you cannot allow nearly half a million policy holders across the country to face that same situation," he said.

"I think the principle that this is an area the Government needed to intervene in the interest of policy holders, who face a significant risk if the company were to go under, justifies action taken to sustain the company in the immediate future."

Goff said there would need to be safeguards in place to protect the long-term interest of taxpayers but could not comment in detail on the merits of the package without looking closely at how it would be applied.

'THEY HAVE NO CAPITAL LEFT'

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. It is understood all that money has been allocated to pay existing claims.

"They have burned through everything," the source said. "They have burned through all their reinsurance cover plus their capital. They have no capital left."

AMI did not sell commercial insurance, which would limit its exposure to further substantial earthquake claims relating to damaged property in the central business district's "red zone".

Concerns have been swirling around the insurance industry about AMI's ability to meet its claims after Government estimates that it could cost up to $15b to rebuild Christchurch.

AMI's credit rating was downgraded by agency AM Best from A-plus to A-minus, with the new rating also put under review with negative implications.

Insurance Council chief executive Chris Ryan said all insurance companies continued to be rated as investment-grade.

AMI complied with the council's minimum solvency standards. However, AMI had been asked to provide an updated disclosure of its financial position after it announced it was looking at options to raise capital, Ryan said.

FACTS

AMI has more than a 30 per cent market share of the fire and general insurance market in Canterbury.

AMI was been downgraded by credit ratings agency AM Best Co from A-plus to A-minus because of the likely use of its capital to cover the February 22 earthquake.

AMI is a mutual company, meaning that its customers are also its owners.

AMI has a network of 73 branches, two call centres and 22 agencies across New Zealand

HISTORY

Formed in 1926 as South Island Motorists Union.

Later it formed a company called Allied Mutual Insurance, from which AMI derives its name.

This company formally changed the name in 1997.

Mutual shares are held by a trust formed in 1997 because of a change in legislation.

In the fiscal 2010 year the company reported policy growth that helped it to a "record" net surplus after tax of $31 million.

After the September 4 earthquake John Balmforth said the company had received 8500 quake-related claims.

In March he said the company was raising capital which might be used to cover claims from the February 22 quake.

- with Roeland van den Bergh and Martin Kay

- BusinessDay.co.nz