AMI policyholder support package - the details

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.
• 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.o 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.