AMI quake claims at top end of range, govt supportive

The cost of Canterbury earthquake claims, over and above available reinsurance, is likely to be about $531 million, at the top end of estimates, AMI said today.

Announcing its results for the year to June 30, 2011, AMI said it will provide an extra $229 million risk margin (contingency sum) with almost all of the costs stemming from the February earthquake.

Responding to the announcement, Finance Minister Bill English said the government is standing behind its support agreement for AMI Insurance policyholders, as Treasury continues to work closely with the company on recapitalisation options.

He says the government has not been called on to pay any money under the support agreement.

“AMI is using its own capital reserves and reinsurance to pay claims from the Canterbury earthquakes as they come due,” Mr English says.

AMI said the calculations of the likely cost of claims and the contingency sum were provided by an international actuarial consultancy it commissioned.

AMI said they take into account the recent upward revision by the Earthquake Commission of the number of house claims they expect to receive over their maximum level of cover.

“These calculations are the best estimates available, but it will be the middle of next year before the company has reliable projections based on resolution of claims to that point,” says AMI chairman Kerry Nolan.

In April, the Government announced a backup financial support package to give AMI policyholders certainty and to ensure an orderly rebuild of Christchurch in the aftermath of devastating earthquakes in September and February.

The support package will be called on only as a last resort if AMI’s own reserves have been exhausted – unless the Government believes it is in the public interest to take control sooner.

If called on, the package would involve the Government investing up to $500 million of equity in AMI, with the right to take ownership and assume control of the company if needed.

The ultimate cost to the Government will depend on the final cost of AMI’s claims, which remain uncertain, and the outcome of AMI’s recapitalisation process, which is still underway.

However, based on the $705 million annual loss reported by AMI today, the best current estimate of the likely cost of the Government’s support package is $337 million.

This will be reflected as an impairment for that amount in the Government’s annual accounts for the year to 30 June, to be published next month.

“AMI Insurance has set aside a large amount of money in anticipation of future claims from the Canterbury earthquakes, which is the prudent thing to do,” Mr English says. “In addition, reinsurers continue to support AMI, with $1.4 billion of reinsurance in place to cover any further disasters in the 2011/12 year.

“The company’s underlying business and earnings - without the impact of the earthquakes and the need to provision for them - remain strong.”

AMI included calculations of net earthquake claims and the recommended contingency sum have been included in its annual accounts to June 30, 2011, which recorded an after-tax loss of $705 million.

“AMI continues to trade strongly. We are able to pay all normal day-to-day and earthquake claims as they are settled,” Mr Nolan says. “We have effectively set aside $760 million, which includes a large contingency, to pay earthquake claims as they are settled over the next few years and have already paid out $80 million.”

Mr Nolan says the company would have made a record profit but for the impact of various earthquake-related costs during the year, and the need to make provision for the future payment of earthquake claims.

Instead, AMI has recorded an after-tax loss of $705 million compared with an after-tax profit of $33 million in the previous year.

Gross written premium income of $362 million for the year compares with $341 million in the previous year.

“Almost all of the loss has been caused by claims related to the February earthquake, rated as a one in 2500 year event. This was the most damaging disaster in New Zealand’s history and, I believe, the most expensive insurance situation to occur in any country relative to GDP.

“In making provision in the accounts to June 30, 2011 for future claims, we believe we have allowed for worst-case scenarios and added an appropriate contingency sum, but only time will tell what the final figures will be.”

Mr Nolan says AMI is confident about its trading situation and expects to show a trading profit in the current financial year.

In the uncertainty following the earthquakes the company says it has maintained customer numbers, and is continuing to win new business. While insurance premiums are increasing as a result of the increased cost of reinsurance, customers understand that this is inevitable due to recent catastrophic events around the world including the Canterbury earthquakes, Japan’s tsunami, Australian floods and tornadoes in the United States.

AMI has reinsurance in the current year of up to $ 1.4 billion for any major event in New Zealand.