The Government has announced it will provide a back up financial support package for AMI Insurance.

The information below is from the release by Finance Minister Bill English.

AMI policyholder support package

The policyholder support package will be used only as a last resort if the company’s own reserves have been exhausted – unless the Crown believes it is in the public interest to take control sooner. This would involve the Government investing up to $500 million in AMI, with the right to take ownership and assume control of the company.

The full extent of the claims AMI faces will remain unclear for several months – it depends on the scale of damage in Christchurch, which is still highly uncertain.

However, it is possible that the company could face losses in excess of $500 million – or indeed, they could be less. If the loss were to be greater than $500 million, the Crown would stand behind the claims.

Under the policyholder support package:

• The Crown’s policyholder support arrangement of up to $500 million provides the company with a platform from which to explore further recapitalisation options.
• AMI has paid the Crown a $15 million up front establishment fee for the support package.
• AMI has issued convertible preference shares to the Crown, but the Crown has not yet paid for them. AMI tells us that if payment is required, it may not need to happen for two years.
• Payment of up to $500 million will happen only if AMI’s own resources are depleted below the level that is prudent for an insurance business, or if the Crown decides it is in the public interest to make a payment.
• In exchange, the Crown could take ownership of AMI and have control of the board.
• If the arrangement is called on by AMI, it can later exit the support arrangement by repaying the Crown, along with any dividends owing.

The support package for policyholders will:

• Provide a financial backstop for policyholders so the rebuilding of Christchurch is not jeopardised by potential solvency or liquidity issues.
• Preserve AMI’s existing contracts, including its reinsurance arrangements.
• Provide flexibility for AMI and the Crown going forward.

The unpaid convertible preference shares issued to the Crown:

• Are a last resort – the shares will be paid for only if the company exhausts all other options – or if the Crown believes it is in the public interest to take control sooner.
• Give the Crown the right to any dividend payments, ahead of ordinary shareholders. This is what the “preference” part of the shares involves, having preferential treatment ahead of other shareholders.
  
  - Other shareholders won’t get any dividends while the Crown has a shareholding.
  
  - Dividends paid to the Crown will be at the official cash rate plus an additional 5.5 per cent.
• Allow the Crown to take ownership of AMI, if necessary, by making a partial payment of $100 million. The convertible preference shares allow them to be converted to ordinary shares in AMI.

Fee paid to the Crown

• AMI has paid a $15 million fee to the Crown for this support arrangement. The fee is not refundable, even if the Crown never pays AMI for the shares. AMI will reimburse the Crown for the costs of developing and implementing the support arrangement.

Exit arrangements

If it becomes clear that AMI can pay all likely claims by policyholders, or if AMI arranges other appropriate sources of capital, AMI will:

• Redeem the shares it has issued to the Crown, if they haven’t been paid for, or:
• If the shares have been paid for, AMI will repay the Crown along with any dividends owing, and then redeem the shares.

Managing the risks

The Crown will soon appoint a director to AMI’s board and an observer to key governance or management meetings. If at any stage the Crown makes a payment for the shares, or if AMI breaches certain conditions, the Crown can replace all of AMI’s directors. AMI has also agreed that its service levels will meet or exceed industry standards and that it will comply with prudential requirements established for insurance firms by the Reserve Bank.

Questions and answers

1. Why has the Government taken this step?
The Government’s support package for AMI policyholders is designed to ensure that policyholders’ claims are all paid in full, and that the rebuilding of Christchurch is not jeopardised by worries about potential solvency or liquidity issues. The Government will continue to closely monitor AMI’s performance to ensure these objectives are being met. The Government’s focus will continue to be the rebuilding of Christchurch, ensuring the claims process proceeds in an orderly manner and that confidence in New Zealand’s insurance sector is maintained.

2. How much will this cost the Government?
AMI has agreed to pay $15 million to the Crown for this support arrangement. The Crown will invest up to $500 million if it has to pay for the shares AMI has issued, which would provide the company with a platform from which to explore further recapitalisation options.

The full extent of the claims AMI faces will remain unclear for several months – it depends on the final cost of damage in Christchurch, which is still highly uncertain.

It is certainly possible that the company could face losses in excess of $500 million – or indeed, they could be less. If losses were to be greater than $500 million, the Crown would stand behind the claims.

3. How will the Government pay for this?
Ministers have agreed to a $500 million appropriation so the shares can be paid for, if necessary.

4. What influence will the Government have over the company in return for this support package?
We will appoint a director and an observer to the company, who have the right to attend meetings, and a legal contract has been put in place requiring AMI to meet industry service standards. At any time, with the payment of $100 million, the Government can elect to take control of the company.

5. What does this mean for AMI policyholders – in both Christchurch and the rest of New Zealand?
For AMI policyholders in Christchurch and throughout New Zealand, it means that they can be sure that their insurance claims will be processed and paid in the normal manner. This will allow them to get on with the task of repairing or replacing their insured homes, cars and goods, and rebuilding their lives. For AMI policyholders who don’t currently need to make claims, it means they can be assured that their insurance will still be there if they need to claim on it.

6. How did this situation arise?
This is the result of the two Canterbury earthquakes. As far as officials are aware, AMI has complied with statutory requirements.

7. How long has the Government known about AMI’s problems?
AMI initially approached the Government on 9 March 2011 with concerns that it may not be able to meet all its obligations from its reinsurance and reserves. 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.

8. If AMI arranges new capital from elsewhere, is there likely to be any cost to the Crown?
AMI will seek to raise the capital it needs elsewhere. If AMI arranges other appropriate sources of capital, it will redeem the shares it has issued to the Crown, and if the shares have been paid for, AMI will also repay the Crown along with any dividends owing, and then redeem the shares.

9. Given all the uncertainty, what is the best case/worst case scenario?
The best case is that AMI can meet all claims from its reserves and reinsurance while remaining within prudent capital limits, or another private-sector solution can be found. The policyholder support package has been put in place because there is some uncertainty about the likely level of claims. If the support package is called on, the Crown will invest up to $500 million in AMI, which would provide the company with a platform from which to explore further recapitalisation options.

The full extent of the claims AMI faces will remain unclear for several months – it depends on the final cost of damage in Christchurch, which is still highly uncertain.

10. When does the Government expect to know whether AMI will need money from the Crown?
This is currently not known. However, it could take up to 18 months before we have clarity about whether support funding is needed.

11. What is the state of the wider New Zealand insurance industry?
The Reserve Bank’s assessment so far is that the bulk of the mainstream insurance sector is sound and functioning well. Policyholders can be confident that New Zealand’s insurance industry has sufficient reinsurance and reserves to cover households insured in the retail insurance market.

12. Will the Government provide similar support for policyholders in other insurance companies?
The Government would need to assess each situation on a case by case basis. In general, the Government does not get involved with supporting companies, because risks should be borne where they are best managed - by market participants.

AMI is in an unusual situation – it’s a significant insurance company with a large proportion of its customer base in Christchurch - requiring a special response, which is not the normal course of action for an insurance company facing issues. There is no need for broader intervention in the insurance industry and no compelling case to handle commercial failures other than in the normal commercial manner

12. Why didn’t the Government provide similar assistance to Western Pacific Insurance policyholders?
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.

13. Why didn’t the Government simply accept that AMI might fail and use EQC as a backup to look after policyholders?
EQC covers the first portion of a residential earthquake claims limit of $100,000 for houses and $20,000 for household contents, plus GST. AMI’s obligations are for residential claims that exceed EQC’s coverage.

14. Can the Crown pay less than the $500 million maximum capital into AMI?
Yes, the Crown can pay less. AMI may not need payment for all of the convertible preference shares that it has issued to the Crown.

15. What is a convertible preference share?
A convertible share is a form of company equity that can be changed into a different type of share. A preference share entitles a shareholder to dividends ahead of ordinary shareholders, usually at a rate specified when the share is issued. With the support package for AMI policyholders, in certain circumstances the Government can choose to convert its preference shares into ordinary shares, giving it ownership of AMI. The dividend is payable at the official cash rate plus a 5.5 per cent margin.

16. If the shares can be redeemed by AMI and possibly even without any dividends, isn’t this just a free loan?
No, this support arrangement provides AMI with equity capital as a last resort and for a fee. It is not a loan.

17. What fee will AMI pay for this arrangement?
AMI has paid the Crown a $15 million fee to have this support arrangement in place.

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