By Gareth Vaughan
A selected group of potential buyers will receive detailed financial information on beleaguered AMI Insurance this week as the mutual society's adviser Goldman Sachs formally kicks off the process of finding the capital AMI needs to get back on an even keel after the Christchurch earthquakes.
Interest.co.nz understands a small number of potential bidders for AMI, which holds about one-third of Christchurch home and contents insurance policies, will receive an information memorandum this week. Indicative bids are then expected within about four to five weeks.
The number of parties set to receive the information memorandum is expected to be small and include companies already active in the New Zealand insurance sector and potential new entrants. A full sale of AMI is believed to be the probable outcome.
The circulation of the information memorandum comes after AMI chairman Kerry Nolan acknowledged last week, on the back of AMI reporting a NZ$705 million annual loss, that AMI was set to be owned wholly or partly by an outside investor.
'Taxpayers liable for AMI's debt'
As a mutual, AMI has 500,000 policyholders who have effectively been its owners and will see their ownership diluted or lost altogether. Minister for Earthquake Recovery Gerry Brownlee said today that the mutual obligations to the policyholders meant they were liable for AMI's entire debt.
"So I don't anticipate too much problem if there's a solution to what could be a very big bill for some people," Brownlee said. "Clearly that's not a palatable situation."
UPDATE: Brownlee later rang to correct his statement above, saying AMI had a trust structure which held shares in the company, meaning policy holders were therefore not liable for AMI's debts. That effectively meant the only people holding AMI's debt were taxpayers, due to the government's guarantee of AMI, Brownlee told interest.co.nz.
Interest from other insurers
NZX-listed Tower has expressed an interest in AMI and Australia's Suncorp Metway, which owns Vero and most of AA Insurance, and IAG, owner of State and NZI, are seen as potential buyers, as is the Wesfarmers' owned Lumley and QBE Insurance.
In April, following the February 22 Christchurch earthquake, the government agreed to subscribe to NZ$500 million in capital to be paid to AMI as and when needed over five years. AMI's Crown Support Deed requires a minimum level of capital which the insurer's annual financial statements and annual report show had a NZ$76 million shortfall as of June 30 with actual capital of NZ$122.6 million compared with a NZ$198.6 million regulatory capital requirement.
Seeking Reserve Bank licence & says 'we are solvent'
AMI says it has applied to the Reserve Bank, which is in the process of taking on the regulation of insurers, for a provisional licence to operate as an insurer in New Zealand and expects to receive confirmation shortly.
"The company remains solvent but the estimated cost of earthquake claims has resulted in a shortfall in capital necessary to meet Reserve Bank of New Zealand regulatory requirements as contained within the Crown Support Deed," AMI says in its annual report. "The capital restructuring of the company is designed to address the regulatory capital shortfall and assure the long-term viability of the business."
Finance Minister Bill English said last week taxpayers may be in line for a NZ$337 million hit from the government's backstop agreement with AMI, if the insurer isn't able to raise new capital by 2015. Based on AMI's NZ$705 million annual loss, English said the best current estimate of the likely cost to the taxpayer of the government's support package was NZ$337 million. This would be booked as an impairment in the government's accounts for the year to June 30, set to be released in October.
AMI's financial statements show it had gross outstanding claims from the Christchurch earthquakes of NZ$1.937 billion in total, while it had NZ$1.197 billion in reinsurance receivables. AMI says as part of a capital restructure, its ongoing business will be ring fenced from its earthquake liabilities.
The annual report notes AMI has reinsurance of NZ$1.4 billion in place for a "catastrophe event" that might occur in the July 1, 2011 to June 30, 2012 year at a total cost of NZ$52 million. This has an automatic prepaid reinstatement cover of up to NZ$1.3 billion should the first cover be called on during the year.
*Prime Minister John Key speaks below on a slowing of seismic activity in Christchurch and the "widespread interest" he has heard of in AMI.
(Updates with correction from Brownlee on debt comment, videos of comments from Prime Minister John Key and Minister for Earthquake Recovery Gerry Brownlee).
This article was first published in our email for paid subscribers this morning. See here for more details and to subscribe.
I put this in below too
UPDATE: Brownlee later rang to correct his statement above, saying AMI had a trust structure which held shares in the company, meaning policy holders were therefore not liable for AMI's debts. That effectively meant the only people holding AMI's debt were taxpayers, due to the government's guarantee of AMI, Brownlee told interest.co.nz.
Yes , it is a common practice in finance , particularly amongst US banks .... ahem !
... technically AMI is insolvent , but in reality it has a thriving business , with 500 000 customers . It is the directors fault that they ruined the company , not the customers fault .
:-) I just had to look it up (not being a SW fan);
http://frogmatters.wordpress.com/2008/04/10/a-squished-version-of-jabba-the-hutt/
Wow, I'm really surprised by this! phhh NOT!
hehe, I have no insurance of any kind, never have, WHY? cause if you can't see the con for what it really is then you deserve to be mug like this, either via your taxes or your premiums.
Life is risky full stop and I for one can live with that just fine.
Hi all, Brownlee just rang to correct the statement he made in the video. Have put in the article:
UPDATE: Brownlee later rang to correct his statement above, saying AMI had a trust structure which held shares in the company, meaning policy holders were therefore not liable for AMI's debts. That effectively meant the only people holding AMI's debt were taxpayers, due to the government's guarantee of AMI, Brownlee told interest.co.nz.
Cheers
Alex
Not great news, I wish government would go to the people with a referendum when they want to spend my tax money on other peoples bad business mistakes.
Or maybe I should play the game and start a business that sypones money when the times are good leaving nothing but empty promisis and public debt when things inevitably go bad.
As banks and insurance companies are old news I think I'll look into fire sprinklers because I could save thousands on each installation by not connecting to the water supply.
None are more forcefully enslaved than those who falsely believe they are free
Well there are about 1000 Libertarians and I guess you are one v and 4million other NZers......the logic of why they did so is compeling.....
In terms of bad business its a Q of risk management...AMI would seem to have made reasonable choices on the best information available....Im sure if Govn etc was wasting money on excessive insurnace you would be one of the first to whine....
None are so stupid that think the individual can do better than the group...
regards
My understanding Steven, is that AMI were saving costs through being under insured them-self and that they passed this saving onto their clients whom owned the business as mutual shareholders which is how they got to be so large — by undercutting the market.
I was going to harp on about that until I checked to see and yes they did have a A+ rating so like good banks gone bad in America or leaky houses closer to home you could argue that it was a case of slack governmental oversight.
That said the Government is wasting money on excessive insurance through bailing out AMI policy holders just that you are to blind to see it. If the government is going to bail out SCF, AMI investors when things go bad why shouldn't they also bail out Serepisos or you or me or anyone who makes a bad call with their financial bets.
When the trees become a forest sometimes you need to climb a ridge to see over them.
steven appears to have missed that bit , the controversy that raged , when AMI sought government help , a bail-out . And as you say , they created greater profits for themselves , and expanded their market share of the insurance industry , by cheating their policy holders . AMI hadn't purchased sufficient re-insurance to cover the policies they wrote .
... they cheated their clients , they cheated their competitors , and they attempted to cheat the NZ tax-payer .
[ .. steven has labelled me as a " libertarian " too . Don't take it to heart . It's just his manner to pigeon-hole people into convenient little boxes .. ]
No, AMI purchased enough cover to cover as they saw it the level of risks they had modelled was there.
"pigeon-hole" is appropriate for those on the extreme...their view of the world is highly limited.....blinkered.....just like someone sitting at the back of a pigeon hole really....fitting IMHO.
regards
You are suggestng AMI knowingly did not take out enough re-insurance? I think thats a huge stretch....
"bets" thats just it.....there is betting, then there are ponzi scheme developers like Serepios (ie those who only survive as long at the market grows) and then there is a reasonable business decision based on the best advice....
Govn oversight.....well when the company shows its logic and it seems adeaute inlight of known information a Govn or private body isnt going to be able to say much....it itself has no better information.
Therea re those who climb to the top and can still only see the leaves because thats what they want to see.
regards
Yes, I did read at the time that AMI had not taken out adequate re-insurance and of-course if they had taken adequate cover they would not be draining my taxpayers money at this time.
As far as ponzi schemes go you have to understand that all money is created with interest and the only way that interest portion can be repaid is if the market grows, when you can grasp this you will understand why Sereposis and others bet big.
To put that another way look at what 5 cents brought the holder in 1911 and compare that to todays basket of goodies. Of- course we don't even have a 5 cent piece anymore and it is through this process that wealth is created and I should say lost in your case.
On a clear day you can see forever
http://www.stuff.co.nz/business/5678653/AMI-breaches-bailout-deed
AMI CEO John Balmforth is one of the highest paid executives in the country, earning a salary that would rank him in the top 20 among listed company CEOs.
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