A selected group of potential buyers will receive detailed financial information on beleaguered AMI Insurance this week as the mutual society's adviser Goldman Sachs formally kicks off the process of finding the capital AMI needs to get back on an even keel after the Christchurch earthquakes.
Interest.co.nz understands a small number of potential bidders for AMI, which holds about one-third of Christchurch home and contents insurance policies, will receive an information memorandum this week. Indicative bids are then expected within about four to five weeks.
The number of parties set to receive the information memorandum is expected to be small and include companies already active in the New Zealand insurance sector and potential new entrants. A full sale of AMI is believed to be the probable outcome.
The circulation of the information memorandum comes after AMI chairman Kerry Nolan acknowledged last week, on the back of AMI reporting a NZ$705 million annual loss, that AMI was set to be owned wholly or partly by an outside investor.
'Taxpayers liable for AMI's debt'
As a mutual, AMI has 500,000 policyholders who have effectively been its owners and will see their ownership diluted or lost altogether. Minister for Earthquake Recovery Gerry Brownlee said today that the mutual obligations to the policyholders meant they were liable for AMI's entire debt.
"So I don't anticipate too much problem if there's a solution to what could be a very big bill for some people," Brownlee said. "Clearly that's not a palatable situation."
UPDATE: Brownlee later rang to correct his statement above, saying AMI had a trust structure which held shares in the company, meaning policy holders were therefore not liable for AMI's debts. That effectively meant the only people holding AMI's debt were taxpayers, due to the government's guarantee of AMI, Brownlee told interest.co.nz.
Interest from other insurers
NZX-listed Tower has expressed an interest in AMI and Australia's Suncorp Metway, which owns Vero and most of AA Insurance, and IAG, owner of State and NZI, are seen as potential buyers, as is the Wesfarmers' owned Lumley and QBE Insurance.
In April, following the February 22 Christchurch earthquake, the government agreed to subscribe to NZ$500 million in capital to be paid to AMI as and when needed over five years. AMI's Crown Support Deed requires a minimum level of capital which the insurer's annual financial statements and annual report show had a NZ$76 million shortfall as of June 30 with actual capital of NZ$122.6 million compared with a NZ$198.6 million regulatory capital requirement.
Seeking Reserve Bank licence & says 'we are solvent'
"The company remains solvent but the estimated cost of earthquake claims has resulted in a shortfall in capital necessary to meet Reserve Bank of New Zealand regulatory requirements as contained within the Crown Support Deed," AMI says in its annual report. "The capital restructuring of the company is designed to address the regulatory capital shortfall and assure the long-term viability of the business."
Finance Minister Bill English said last week taxpayers may be in line for a NZ$337 million hit from the government's backstop agreement with AMI, if the insurer isn't able to raise new capital by 2015. Based on AMI's NZ$705 million annual loss, English said the best current estimate of the likely cost to the taxpayer of the government's support package was NZ$337 million. This would be booked as an impairment in the government's accounts for the year to June 30, set to be released in October.
AMI's financial statements show it had gross outstanding claims from the Christchurch earthquakes of NZ$1.937 billion in total, while it had NZ$1.197 billion in reinsurance receivables. AMI says as part of a capital restructure, its ongoing business will be ring fenced from its earthquake liabilities.
The annual report notes AMI has reinsurance of NZ$1.4 billion in place for a "catastrophe event" that might occur in the July 1, 2011 to June 30, 2012 year at a total cost of NZ$52 million. This has an automatic prepaid reinstatement cover of up to NZ$1.3 billion should the first cover be called on during the year.
*Prime Minister John Key speaks below on a slowing of seismic activity in Christchurch and the "widespread interest" he has heard of in AMI.
(Updates with correction from Brownlee on debt comment, videos of comments from Prime Minister John Key and Minister for Earthquake Recovery Gerry Brownlee).