AMI bailout should be last - critics

A deal with insurer AMI that could cost taxpayers up to $1 billion should be the last of its kind, critics say.

Finance Minister Bill English today announced a "back-up" support package of up to $500 million for AMI to give certainty to its 485,000 policyholders that their claims would be covered.

The package would be called on only as a last resort if the insurer's reserves were exhausted, and he said the bill could double to $1b.

"The upper limit of the liability will depend entirely on how many claims there are and the cost of those claims," he said.

"Whatever equity the Crown puts in, there is the possibility of recovery of that through potentially the sale of the business."

The deal was widely supported, with Labour's finance spokesman David Cunliffe saying it was within New Zealand's interest for the Government to stand behind AMI.

But the public was "sick and tired" of bailing out the private sector.

"I understand that the company did have some reinsurance cover, as a mutual it is now in a situation where it might find it difficult to go to shareholders for additional equity and hence the need for some crown support, but you do raise the issue of why one company and not another."

Green Party co-leader Russel Norman also supported the move as it gave certainty to policyholders, while ACT MP Sir Roger Douglas said the Government should make it clear AMI would be its last bailout.

A possible suitor for the company emerged after Tower Ltd said it was planning to buy AMI, which has a bigger fire and general insurance business.

Tower's managing director Rob Flannagan was considering creating a New Zealand-owned insurance company listed on the NZX. He was seeking to have talks with AMI after earlier contacting the troubled company to offer assistance.

Tower had raised $80m in a capital raising last year for the purpose of acquisitions, and could recapitalise the business, he said.

Mr English said the government package would give time for the insurer to seek a market solution.

The Government would appoint a director and an observer to the company; and it would take ownership and assume control if the bailout was needed or if it was within public interest.

AMI, which paid $15m for the deal, issued the Government unpaid convertible preference shares and would pay dividends at the official cash rate, plus an additional 5.5 percent.

The company could exit the arrangement by repaying the Government, along with any dividends owing.

AMI chief executive John Balmforth said the company believed it was in a "very good" financial position without the Government's support, and could meet all claims.

It sought assistance in the interests of a conservative approach to management and to give security and confidence to policy holders.

AMI had $600m in reinsurance and $350m in reserves to cover the February earthquake, and had another $600m reinsurance to cover the September quake, with claims having settled around $450m.

It was a question of where the claims from the February quake, now around $660m, would end up.

AMI said there had been no evidence that an extension to its reinsurance cover above $600m for the second event had been warranted.

"However, the occurrence of a second earthquake in the same area, resulting in a much higher level of damage, was unprecedented and has made heavier demands on AMI's resources," Mr Balmforth said.

AMI had further reinsurance cover of $1b to meet a third event and additional back-up cover to meet a fourth event should they happen before June 30. Arrangements were being negotiated for the period after that.

The company's credit rating was downgraded two notches by AM Best from A plus to A minus following the February quake.

AMI is the biggest insurer in Christchurch covering a third of all homes, contents and motor vehicles, with 85,000 policyholders and 225,000 policies.