AMI looking at selling parts of its business

AMI Insurance may have to try and sell part of its company as it tries to avoid calling on a $500 million bailout facility from the government.

AMI chief executive John Balmforth said the bailout is designed to give AMI customers full confidence in the company following uncertainty about how much it will have to pay out in claims following the destructive February 22 quake

The final amount of AMI’s exposure from the quake remains uncertain. Although the flow of claims has slowed significantly in recent days, the final tally and cost is not known.

“An accurate estimate on the final financial commitments for the second quake are probably still a couple of months away. There are simply too many unknowns at this stage.

“Uncertainty about the final claims tally has translated into uncertainty about AMI’s ability to pay. We could not allow such concerns to mount and it was for this reason that we asked government to stand behind us during this difficult period.

“We will not draw down on the capital facility from government unless we have to.

“The February 22 event has tested our reinsurance levels, but we have over $350 million of reserves. Time will tell whether these will be sufficient.

“But even if we exceed our reserves, with the support from government our customers can be sure they will be paid and the business will continue as usual.

“We are particularly grateful for the speed with which government has been able to move on this matter. This is a commercial arrangement with government. Our intention is to seek an alternative arrangement from the commercial sector to replace the government support facility, but that requires more time. By stepping in now government has given us time,” he said.

The issue by AMI of convertible redeemable preference shares allows a capital injection from government up to a maximum of $500 million.

AMI’s objective is to obtain a replacement facility if required, as soon as possible. Options could involve sale of part of the company to a commercial partner or investor.

AMI says it has had to pursue this line of action because, as a mutual company owned by its customers, it does not have access to shareholder funds as do most other companies.

When AMI requires additional capital, as it may do in these circumstances, it must raise it in different ways than, say, a publicly listed company.

AMI’s catastrophe reinsurance was purchased at a level beyond that predicted by a variety of independent earthquake impact models.

The damage from the September 4 earthquake was consistent with those predictions and well within AMI’s resources.

AMI says there was no evidence that an extension to reinsurance cover above $600 million for the second event was 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.

AMI has further reinsurance cover of $1 billion to meet a third event and additional back-up cover to meet a fourth event should they occur before 30 June 2011.

Further arrangements are being negotiated for the period after that date.

“This is a robust and successful company. We do not see any long term risk to our business or our customers. We have moved quickly to secure this arrangement with government to reassure our customers of our ability to meet claims,” Mr Balmforth said.
said.

“We believe that a stable insurance market is critical to the rebuild of Christchurch. We are committed to its restoration both as an insurer and as a good Canterbury citizen,” he
said.

AMI is the largest New Zealand-owned fire and general insurer with a network of 73 branches, two contact centres and 22 agencies. It has 830 staff and in 2010 recorded a profit of $31 million.