AMI 'very grateful' for Govt rescue

Bill English this morning announced a $500m backup package for AMI. Photo / Mark Mitchell

AMI's chief executive John Balmforth said this morning he was "very grateful" the Government had stepped in to help and the company would not be drawing down on the money offered unless it had to.

The package was "designed to give our customers full confidence in the company following uncertainty about how much AMI will have to pay out in claims" following the February 22 earthquake, said Balmforth.

"The final amount of AMI's exposure from the quake remains uncertain. Although the flow of claims has slowed significantly in recent days, the final tally and cost is not known," he said.

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.

"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," he said.

He said the company would not "draw down on the capital facility from Government unless we have to".

The February earthquake had "tested our reinsurance levels, but we have over $350 million of reserves. Time will tell whether these will be sufficient," said Balmforth.

"But even if we exceed our reserves, with the support from Government our customers can be sure they will be paid and the business will continue as usual."

Balmforth said he was "particularly grateful for the speed with which Government has been able to move on this matter."

This is a commercial arrangement with Government, he said, and the company's intention was to seek an alternative arrangement from the commercial sector to replace the Government support facility, but that required more time.

"By stepping in now Government has given us time," he said.

"AMI has had to pursue this line of action because its position is different from the other large insurers in the New Zealand market. It is a mutual company owned by its customers. It does not have access to shareholder funds as do most other companies.

When AMI requires additional capital, as it may do in these circumstances, it must raise it in different ways than, say, a publicly listed company."

Balmforth said AMI's "catastrophe reinsurance" was bought at a level beyond that predicted by a variety of independent earthquake impact models. The damage from the 4 September earthquake was consistent with those predictions and well within AMI's resources.

"There was no evidence that an extension to AMI's reinsurance cover above $600 million for the second event was warranted. However, the occurrence of a second earthquake in the same area, resulting in a much higher level of damage, was unprecedented and has made heavier demands on AMI's resources."

AMI had further reinsurance cover of $1 billion to meet a third event and additional back-up cover to meet a fourth event should they occur before 30 June 2011. Further arrangements are being negotiated for the period after that date.

"This is a robust and successful company. We do not see any long term risk to our business or our customers. We have moved quickly to secure this arrangement with Government to reassure our customers of our ability to meet claims," Balmforth said.

The union representing some AMI workers, Finsec, welcomed the government support package.

"AMI customers need certainty about the security of their insurance policies," said Finsec General Andrew Casidy. "We welcome this first step in providing that certainty at this time."

Casidy said that Government support for AMI was significant not only for customers and for the New Zealand economy as a whole, it was also important for AMI's approximately 800 local staff.

"The last thing New Zealand, and particularly Christchurch needs is more job losses. The whole community knows the value and importance of the work that AMI staff do. We believe that protecting their jobs through this period is another essential part of the earthquake recovery package." he said.

Another insurer, AA Insurance, this morning was distancing itself from speculation about AMI's position, reminding the public it had no connection with the company.

AA Insurance chief executive Chris Curtin said the company had the financial strength to take care of its customers' claims and a strong financial strength rating.

AA Insurance is a joint venture between New Zealand Automobile Association and Australia's Suncorp-Metway Limited, Australasia's largest general insurance group and the fifth largest bank.

- NZ HERALD ONLINE