Published 8 April 2011
The Government said yesterday it would provide a back-up financial support package for AMI Insurance Ltd to give policyholders certainty and to ensure an orderly rebuild of Christchurch in the aftermath of the 2 earthquakes.
Finance Minister Bill English said the support package would be called on only as a last resort if AMI’s own reserves have been exhausted – unless the Government believes it is in the public interest to take control sooner.
AMI has paid the Government a $15 million up-front establishment fee for the support package and has issued convertible preference shares to the Government, but the Government has not yet paid for them. “AMI tells us that if payment is required, it may not need to happen for 2 years,” Mr English said.
He said the support package would give AMI the time to seek a market solution – to find alternative funding.
If the package is called on, the Government would invest up to $500 million of equity in AMI, with the right to take ownership and assume control of the company if it needs to.
Christchurch-based AMI Insurance is New Zealand’s second-largest residential insurer with 485,000 policyholders & 1.2 million policies. After a concerted campaign to grow its business in Christchurch, it has 85,000 policyholders with 225,000 policies there – about 35% of the residential insurance market in the city.
Mr English said AMI approached the Government on 9 March, concerned that its reserves & reinsurance might not be enough to cover the total value of claims resulting from the Canterbury earthquakes.
“It was the Government’s judgment 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.
“The alternative of doing nothing would likely have been severe, potentially leaving many thousands of AMI policyholders without the insurance cover & financial resources needed to rebuild. It would also have led to long delays in processing claims, other claims being only partially met and many of AMI’s customers in Christchurch not having insurance cover for future risks.”
“Events such as this show the importance of getting the Government’s finances back into good shape as soon as possible. The Government remains committed to returning to budget surpluses and this arrangement doesn’t alter that commitment.”
The AMI package comes on top of 2 other hits from the earthquakes and the collapse of the finance sector. The Government’s accounts for the 8 months to February, released last Friday, include an estimate of the Earthquake Commission’s net cost of $1.5 billion and a $331 million increase in the Government’s expected loss from the retail deposit guarantee scheme, which covered eligible depositors in failed financial institutions.
Mr English said most of the guarantee increase was attributable to a reduction in expected related-party loan recoveries from the receivership of South Canterbury Finance Ltd. The increase resulted from updated information on South Canterbury’s lending business provided by the receivers.
"Overall, we now expect a net loss from the retail deposit guarantee scheme of around $1.2 billion, compared with earlier estimates of around $900 million."
Want to comment? Go to the forum.
Attribution: Ministerial releases, story written by Bob Dey for the Bob Dey Property Report.