AMI admits February 22 quake claims will blow out its reinsurance cover and it needs fresh capital to repay taxpayer backstop

By Bernard Hickey

AMI Insurance has finally admitted that claims from the February 22 Christchurch earthquake will be more than its NZ$600 million reinsurance cover and it has appointed Goldman Sachs for advice on how to find fresh capital to repay a taxpayer backstop.

AMI Insurance Chairman Kerry Nolan also confirmed that Chief Executive John Balmforth is traveling in Europe and the Caribbean to obtain fresh reinsurance cover beyond June 30 this year. He is expected to be out of New Zealand for five weeks, including a period attending a meeting for the International Cooperative and Mutual Insurance Federation, where he is the Chairman.

"AMI’s recently announced arrangement for the Government to provide up to NZ$500 million in extra capital, if necessary, has freed the company to use its own capital of NZ$350 million to meet claims once the NZ$600 million of existing reinsurance cover has been exhausted,  without breaching the regulations governing the insurance industry," AMI said in a statement announcing the recapitalisation.

“We do not have a cashflow problem, but we need to address the company’s capital structure for the long term," Nolan said.

Fresh capital would allow AMI to repay convertible preference shares it issued to the Government as part of the support arrangement. See Alex Tarrant's article here on the initial goverment bailout.

“We invited submissions and considered proposals from a number of leading capital advisors. Based on the programme Goldman Sachs presented and their experience in this area, we have every confidence they will provide the Board with a suitable solution," Nolan said.

A number of capital raising options were available, he said, without detailing them. AMI's preference was to remain a mutual.

"The recapitalisation project will take some months because AMI needs to determine the extent of its liabilities arising from the February 22 earthquake. This cannot be achieved until after the May 22 deadline for lodging earthquake related claims has passed, and current uncertainties around remediating earthquake damaged land are resolved."

AMI expected to be able to quantify its exposure by the end of August, which would clarify its need for fresh capital.

One issue causing uncertainty was whether EQC would categorise the September 4 and February 22 earthquakes as two seperate earthquakes that would allow home owners with destroyed homes to combine the EQC's NZ$100,000 payouts into a single payout of NZ$200,000 for a single house, Nolan told interest.co.nz in an interview. He said industry and the EQC were in discussions on the issue, but said he had not further details.

AMI said it held further reinsurance of NZ$1 billion to cover a third disaster event in New Zealand before June 30, as well as current cover of up to NZ$600 million for a fourth event before that date.

AMI is a currently a mutual owned by its policyholders with 70 branches throughout the country and more than 450,000 customers holding some 1.2 million policies.

Nolan said healthy new business continued to be written with a net loss of fewer than 1% of policies since 22 February.

“With the welcome back-up arrangement negotiated with Government to supply further capital if needed, our customers can have absolute confidence that their claims will continue to be met, both now and in the future.”

Nolan said the government's appointee to the board of AMI Insurance, John Pritchard, had been consulted in the decision to appoint Goldman Sachs via a teleconference, but had yet to meet the board as he was traveling overseas for five weeks. Nolan said a Treasury official had been present at all board meetings since the backstop facility was put in place.

(Updated to include details from interview with Kerry Nolan)