Christchurch-based AMI Insurance approached the government on March 9 saying it may need financial support after seeing an EQC estimate that 10,000 homes in Christchurch may need to be rebuilt or written off following the February 22 earthquake, documents show.
Treasury has released over 20 documents on AMI and the wider insurance industry following the February 22 Christchurch earthquake.
AMI had approached the government on March 9 saying it may not be able to meet all of its obligations if an EQC estimate that 10,000 homes may need to be rebuilt or written off was correct. NZPA first reported the 10,000 figure on March 1.
The AMI board met on March 17 and decided to specifically ask government for support.
At the time off announcing the government support, Treasury estimates were that the government's liability from AMI could be anywhere between zero and NZ$1 billion.
In a joint Treasury/Reserve Bank letter to Finance Minister Bill English on March 10, officials said they had discussions with AMI chairman Kerry Nolan to try and understand its financial position after the insurer approached the government.
"AMI’s Chairman yesterday raised with your office the risk that, if the initial estimates of 10,000 homes needing to be rebuilt/written off are correct, there is a chance it may not be able to meet all its obligations to policy holders," officials said.
"The outlook for AMI is very uncertain, as it is likely to be some weeks before the outlook is clearer, given that the key uncertainty is the number of Christchurch homes that are assessed as requiring total rebuild or to be written off," the officials said
"Our initial assessment is that if the 10,000 is accurate, AMI’s is [sic] vulnerable but there are wide error bounds around its financial position in that event. Our current estimates are that this would place their net asset position at NZ$80m +/- NZ$120m although does not preclude a significantly worse outcome," they said.
"Officials will step up their monitoring of the situation and will investigate resolution options should Ministers wish to intervene in the event of AMI’s financial distress.
"We do not expect other insurers to be as vulnerable as AMI," the officials said.
"We would recommend you keep public comment to a minimum at this stage given the high degree of uncertainty about AMI’s position," they said.
Govt aware of pending downgrade
Meanwhile a Treasury document dated March 23 shows the Government was aware rating agency AM Best was going to downgrade AMI's rating the next day. Government had provided AMI a 'letter of comfort' to take to AM Best so the ratings agency would not significantly cut AMI's rating.
Read about the downgrade in Amanda Morrall's article here.
"You should also be aware that AMI’s credit rating agency will tonight (at 10 pm) be announcing that it has downgraded AMI “two notches” from A+ to A- with a negative outlook. Treasury together with the Reserve Bank will be carefully monitoring reaction to that announcement," the Treasury memoire to Finance Minister Bill English said.
Replace the board?
Meanwhile, another memoire to English on March 25 showed Treasury considered making it a condition for Crown support of AMI, that the board of AMI resign and that management was replaced with a new team.
The note came in a Treasury discussion on the conditions of Crown support - whether the Crown just have the capacity to control AMI under the agreement, or whether the Crown would control AMI under the agreement.
The end result was that the government appointed a Director to the AMI board and has the option to take control of the company if it wishes, and the company’s management team remained.
In a for-and-against argument for option of the AMI board resigning and the Crown taking control of the company, the ‘for’ arguments were:
- Full Crown control of the board assumed immediately; with ownership to either be effected at the same or soon after
- Opportunity for the company to be managed better (this proposition needs to be tested further)
- Exit strategy (eg break up and sale of the good part of the business) can start earlier if that is thought to be the best strategy
The against arguments were:
- Business likely to be disrupted if board/management have to be replaced. Delays resulting from having to identify new appointees
- Government exposed to public/market criticism especially if it is seen to be moving precipitously by assuming immediate control;
- Assuming immediate control may make the problem look worse, than it actually is right now
- May result in causing/exacerbating market disorder rather avoiding or mitigating the problem
- [Withheld]
- Likely higher risk that the re-insurers may seek to cancel reinsurance controls if Crown takes immediate control of company
- Potential to result in the destruction of value (tax losses will be lost);
- May be an option that is simply not acceptable to the existing board forcing govt. to consider statutory management or legislative assumption of control
(Updates with Treasury consideration of replacing board, management.)
5 Comments
As a resident in eastern Christchurch I think AMI were at least sensible to approach the Government as soon as they did. The 10,000 homes figure scared them into it, yet my observations and conversations with fellow residents lead me to believe this figure ( a bit rounded, don't you think?) may in the end prove to be an under-estimate. What I have seen, and been told, is that there are many homes here that while they can be repaired, it will cost more to do so than to demolish and rebuild them. Another problem is that many houses require relevelling, usually by gaining access to under the floor to repile the house. There aren't that many businesses that do this type of work, and you can't expect people to wait decades for their house to come to the head of the queue. Insurers do have an obligation to settle legitimate claims in a timely manner, so perhaps in some instances this could lead to rebuilds if they can be done sooner than repairs.
Although I am not an AMI customer, I can understand the reasoning of the Government's decision to stand behind AMI (I would not call it a bailout just yet - time will tell).
My recollection of events is quite different. Something like:
1. ChrisJ posts a comment suggesting that from his calculations based on data from EQC and what AMI has released publicly, AMI is likely insolvent.
2. The comment is deleted by the powers that be at interest.co.nz.
3. ChrisJ puts up numbers that allow the conclusion to be drawn by anybody interested that AMI will not be able to meet its commitments.
4. From there, things play out much as the article states.
I think people are forgetting that it depends on what type of insurance policy you hold as to what you get t paid out.
I spoke to a lot of builders that have gone and looked at some of these houses and they are finding that a number of residents had agreed value not replacement as it was cheaper...umm so once EQC pays first 100k, they do not have to make up a lot of difference.
The real problem will come when they realise the cost of building a new house is far more than there agreed value.......
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