AMI Insurance says it has accepted a conditional offer from IAG, valued at NZ$380 million, to buy the iconic company's brand and its "good" business while its earthquake related liabilities are assumed by the Government through a separate company.
Under the deal, pending approval by the Reserve Bank, the Commerce Commission and Overseas Investment Office, Government will receive the NZ$380 million and and the money will be used settle AMI's earthquake claims, estimated at close to NZ$2 billlion.
The government stepped in with a NZ$500 million support package for what until now has been a mutually owned AMI after the devastating February 22 earthquake in Christchurch. AMI subsequently reported a NZ$705 million annual loss and breached its Crown Support Deed arrangement through a NZ$76 million shortfall to its NZ$198.6 million regulatory capital requirement.
As a result of the buy-out, Treasury has revised Government's share of AMI's liabilities from NZ$335 million to approximately $120 million.
AMI chairman Kerry Nolan said the IAG deal, expected to be finalised in 6-8 would, not impact customers who could expect "business as usual.''
IAG’s New Zealand CEO Jacki Johnson said "the long established AMI general insurance business is an ideal fit for its existing insurance activities in New Zealand.''
IAG owns State Insurance and NZI in New Zealand. IAG yesterday set a 7.5% annual interest rate on a NZ$325 million issue of unsecured subordinated bonds to New Zealand retail investors that have a 25-year term but are callable at IAG's discretion. See a presentation on the deal from IAG here.
“We respect AMI’s customer-focused ethos and people and its commitment to the communities it serves. We are delighted to be welcoming such an iconic brand and business to our organisation," Johnson said.
“We are impressed with AMI’s business, people and brand and we will be focusing on building on these strengths to help us increase our presence in the New Zealand market.”
On that basis, Johnson said job losses were unlikely. She said it was premature to discuss any staff changes at senior levels at this time.
The acquistion will give IAG a 30% share of the general insurance market in Canterbury. It's North Island policies account for 70% of its business.
The IAG offer is for a newly incorporated company that will acquire all of AMI's existing national business, save its earthquake related exposure.
Canterbury earthquake claims outstanding at the time of purchase will remain with the current company, which will be owned and backed by the Government and given a new name. There will be no other link between the companies.
The new AMI company will acquire almost 500,000 New Zealand customers holding some 1.2 million insurance policies, mainly on houses, contents and cars.
The only remaining business of the existing AMI company, to be given a new name at the time of separation, will be the resolution of Canterbury earthquake claims becoming unconditional. This company will have the financial backing of the Crown, which has backed AMI through the Crown Support Deed since April 2011, to ensure there was no disruption to the Canterbury earthquake recovery.
AMI insures one home in three in Christchurch and the company has already established a dedicated earthquake recovery team of more than 200 people with Arrow International.
This operation will be the core of the Government backed earthquake resolution company, which will have significant capital available, including reinsurance money. Estimates of the cost of resolving AMI’s earthquake claims continue to increase, but are currently around NZ$1.8 billion.
The Government will fund whatever shortfall eventuates over the next few years, as claims are progressively settled, and has budgeted over NZ$300 million for this purpose.
Finance Minister Bill English's office released the following Q&A on the deal.
1. How is the Government involved in this transaction?
The primary transaction is between AMI and IAG. The Government became involved when it agreed to support AMI policy holders to avoid possible significant disruption to rebuilding Christchurch. The support agreement and other relevant documents are available at: www.treasury.govt.nz/publications/informationreleases/canterburyearthqu…
2. What will it cost in the long term?
The Government has previously said in its financial statements for the year ended 30 June 2011 that the support arrangement that protects AMI Insurance’s customers would cost taxpayers $335 million. The final cost to taxpayers is still uncertain, but Treasury's best estimate is the remaining liability will be about $120 million. This is figure is based on AMI's estimated $1.8 billion in earthquake liabilities, reduced by $1.3 billion reinsurance and the $380 million purchase price. When the transactions are paid for, an updated estimate of cost will be disclosed in the monthly Financial Statements of the Government.
3. Will AMI customers still be able to insure their houses after IAG takes over, or will they be insured by the Government?
IAG has also agreed that it will continue to offer insurance to AMI’s customers, as well as all of its existing customers, on renewal and transfers in Canterbury and throughout New Zealand. This undertaking will ensure ongoing insurance cover for 60 per cent of the Canterbury market. The Government is acquiring only AMI's Canterbury earthquake claims and associated reinsurance. Its purpose will be to settle those claims and it won’t be offering new insurance policies.
4. Who will run the business that the Government is buying? Will it be part of CERA, the Treasury, or some other government department?
The business the Government is acquiring will be a Crown company listed in schedule 4 of the Public Finance Act. It will have its own board of directors and Nelson-based company director Ross Butler has agreed to chair the company. Mr Butler has experience in finance and insurance-related companies. He was chief executive of GIO Building Society and GIO Finance in Australia. He managed GIO through its privatisation, and subsequent establishment of banks and insurance companies throughout Australia, Asia and New Zealand. Mr Butler has extensive governance experience across multiple sectors. He is currently chairman of Nelson Marlborough Institute of Technology and deputy chairman of GNS Science.
5. How can the Government be sure that this is the best deal?
The Government’s role in this has been to provide support so that AMI’s customers in Canterbury are properly looked after and the rebuild process can continue. The AMI Insurance board appointed investment bank Goldman Sachs to help it find more capital. The process of finding a long term investor has led to the offer by IAG. The offer has been recommended by Goldman Sachs and considered and approved by AMI Insurance’s directors. The Government’s interests have been protected by getting independent advice from investment bank Deutsche Bank and law firm Chapman Tripp, and having Treasury observers at AMI Insurance Board meetings.
6. If someone has an AMI house policy today, and their house is either a substantial repair or a rebuild, who will they be dealing with once the purchase is completed?
The new Crown company, which will be taking over the management and settlement of earthquake claims.
7. Will today's decision slow the process of getting post-quake results for AMI customers? No, the claims department established by AMI following the earthquakes will transfer to the new Crown company.