New Zealand’s AMI Gets Government Backing to Deal With Quake Losses

AMI Insurance Ltd., a mutual insurer in New Zealand, received a back-up financial package of up of NZ$500 million (US$388 million) from the government to secure sufficient capital to pay out insured claims related to the two earthquakes in Christchurch.

The intent of the package is to create certainty that all claims will be met, said Financial Minister Bill English in a statement. The government would invest the equity into AMI, with the right to take ownership and assume control if needed.

The financial support could be greater than NZ$500 million if AMI faces losses in excess of that amount, said English, who added "or indeed, they could be less," and the government would still stand behind the claims.

"This provides a financial backstop for policyholders so the rebuilding of Christchurch is not jeopardized by potential solvency or liquidity issues and so confidence is maintained in the insurance sector," said English. It is tool early to tell if AMI has sufficient resources to cover all these claims.

The government's support is "unusual" in New Zealand, but its intent is to retain confidence in the insurance sector, similar to the U.S. government's bailout of American International Group Inc. in 2008, said a spokesperson for AMI. The insurer has never received any government's financial support before, the spokesperson said.

A.M. Best Co. downgraded the financial strength rating of AMI Insurance Ltd. to A- (Excellent) from A+ (Superior) and issuer credit rating to "a-" from "aa-". Both ratings have been placed under review with negative implications. The downgrades reflect the negative impact on AMI's capitalization due to the latest loss development from the February earthquake in Christchurch. A.M. Best also said it is concerned with AMI's risk management in relation to its aggregate catastrophe exposures (BestWire, March 23, 2011).

Christchurch-based 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% of residential insurance market share in the city.

AMI approached the government on March 9 with concerns that its reserves and reinsurance might not be sufficient to cover all of the claims related to the Christchurch earthquakes. The support package "would be called only as a last resort only if AMI's own reserves have been exhausted," said English. This also gives AMI time to seek a market solution.

"Our intention is to seek an alternative arrangement from the commercial sector to replace the government support facility, but that requires more time," said AMI Chief Executive John Balmforth in a statement. The sale of part of the company to a commercial partner or investor is among the options.

The issue by AMI of convertible redeemable preferences shares allows a capital injection from government up to a maximum of NZ$500 million. "This is a commercial arrangement with the government," said Balmforth. The mutual insurer "will not draw down on the capital facility from government unless we have to."

"The Feb. 22 [earthquake] has tested our reinsurance levels, but we have over NZ$350 million of reserves. Time will tell whether these will be sufficient," said Balmforth. With the government support, he said the insurer should have sufficient capital to pay out claims and business will continue as usual.

AMI's solvency margin ratio now stands at around 110 to 115, a similar level as before the February earthquake, said AMI.

In the wake of two earthquakes in Christchurch, New Zealand's insurers have faced similar uncertainty on claims exposure. Recently, Western Pacific Insurance Ltd. went into liquidation after concerns about its solvency. The Queenstown-based nonlife insurer wrote commercial and personal lines products, with about 7,000 policyholders in the country.

"Western Pacific faces different issues and is of a different scale and significance to the rebuilding of Christchurch. In this case, there is no compelling case for taxpayer intervention and this commercial failure will be handled in the normal commercial manner," said English.

AMI is in an unusual situation as it is a significant insurance company with a large proportion of its customer base in Christchurch, said English. The government was not in talks with any other insurance companies. The situation needs to be evaluated on a case by base basis.

"The Reserve Bank's assessment so far is that the bulk of mainstream insurance sector is sound and functioning well," said English. New Zealand's insurance industry has sufficient reinsurance and reserves to cover households insured in the primary market.

AMI said it has further purchased reinsurance cover of NZ$1 billion to meet a third event and additional back-up cover to meet a fourth event should they occur before June 30, 2011.

Damage from the first Christchurch quake on Sept. 4 last year was consistent with predictions and well within AMI's resources. "There was no evidence that an extension to AMI's reinsurance cover above NZ$600 million for the second event was warranted," said the mutual insurer. However, the second earthquake occurred in the same area and caused a higher level of damage and heavier demand on AMI's resources.

The February earthquake is expected to cost economic losses of between NZ$10 billion and NZ$15 billion, two to three times the estimated NZ$5 billion loss of the first quake last September, according to the finance ministry. The cost will be shared between the central government, insurers, local government and businesses.

(By Iris Lai, Hong Kong bureau manager: [email protected])