AMI issues $500M of unpaid preference shares to government

AMI issues $500M of unpaid preference shares to government, pays $15M fee

April 7 (BusinessDesk) – AMI Insurance Ltd. says there is “a good chance” it will be able to meet earthquake claims from its own resources though because the full impact can’t be quantified yet it may have to call on a government rescue package.

The Christchurch-based insurer has issued the government with $500 million of unpaid preference shares in preparation for making a call on public funds if needed. The shares would pay annual dividends of 8%, based on the 5.5 percentage points above the official cash rate of 2.5%.

AMI has paid the government a $15 million fee upfront to establish the preference share facility, which Finance Minister Bill English has described as a last resort in the event the company exhausts all other options.

Under the agreement, the government could take ownership of AMI by making a partial payment of $100 million.

AMI chief executive John Balmforth said his firm has reserves in excess of $350 million as well as additional reinsurance of $600 million. The reinsurance “will be tested,” he said in a statement.

If the government support is triggered, AMI would cease to be a mutual. The government has agreed to be involved for a period of up to five years. The government may allow the company to be bought back and it could seek an equity arrangement with a reinsurer or be sold as a going concern, Balmforth said.

AMI has further reinsurance cover of $1 billion in place in the event there is a third major quake and up to $600 million for a fourth event if it occurs before June 30.

“We are in ongoing discussions with our reinsurers about our future cover and we expect to agree treaties before 30 June, Balmforth said.

Rival insurer Tower Ltd. may be interested in reaching a deal with AMI, and managing director Rob Flannagan told BusinessDay.co.nz he has already tested the waters on reaching an arrangement.

English said the support package would be called on “only 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.” The government would “stand behind” claims up to $1 billion, he told journalists at a Beehive briefing.

AMI has the biggest exposure to residential insurance in Christchurch, with about 35% of the market. It is the nation’s second-largest residential insurer with 485,000 policyholders and 1.2 million policies. In Christchurch it has more than 85,000 policyholders with 225,000 policies, according to a statement from English.

AMI first approached the government on March 9, saying its reserves and reinsurance may not cover total claims from the quakes, English said. That’s a day after chief executive John Balmforth told BusinessDesk that the firm was “strongly reinsured and has received excellent support from its reinsurers” as well as holing mainly liquid assets of about $540 million.

Government officials had worked with AMI since then to consider the best options for taxpayers and AMI policyholders, English said.

“The full extent of the claims AMI faces will remain unclear for several months.” English 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.”

AMI is also seeking alternative commercial funding arrangement, English said.

(BusinessDesk)

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