Ministerial Statements — AMI Insurance—Financial Support Package 
Text is incorporated into the Bound Volume 
Ministerial Statements — AMI Insurance—Financial Support Package 
[Sitting date: 07 April 2011. Volume:671;Page:17825. Text is incorporated into the Bound Volume.] 
Ministerial Statements 
AMI Insurance—Financial Support Package 
Hon BILL ENGLISH (Minister of Finance) 
: 
 I wish to make a ministerial statement under Standing Order 347 in relation to Government support for the company AMI Insurance. I seek leave for my statement and the responses of the leaders of the Labour and Green parties to be 7-minute speeches for other parties to have speeches of up to 3 minutes and for my reply to be up to 3 minutes. 
Mr SPEAKER 
: Leave is sought for that course of action. Is there any objection? There is no objection. 
Hon BILL ENGLISH 
: AMI Insurance approached the Government on 9 March concerned that its reserves and reinsurance might not have been sufficient to cover the total value of claims resulting from the Canterbury earthquakes. In response I asked Treasury and Reserve Bank officials to gather information about its true position and to consider the best option for taxpayers and AMI Insurance’s policyholders. AMI Insurance is New Zealand’s second-largest residential insurer with 485000 policyholders and 800 staff primarily insuring residential property. In Christchurch it has 85000 policyholders representing about 35 percent of the residential insurance market. 
The Government rejected the option of doing nothing. This would have left thousands of Christchurch homeowners—many with mortgages—whose properties had been destroyed or damaged without insurance cover. Quite apart from the human misery that would have resulted this would have stalled Christchurch’s reconstruction. The Government established three key policy objectives: first that certainty was to be provided to AMI Insurance policyholders who had purchased insurance in good faith from a large reputable insurer; second that the preferred solution was for the company to find a way to recapitalise itself if necessary and that it should be given strong incentives to do so; and third that if Government assistance was needed the best way to limit the cost to taxpayers was for AMI Insurance to remain a going concern. Other options such as directly guaranteeing payments to Christchurch policyholders in the event the company failed were considered and rejected as being more costly and slow to resolve. 
On 17 March AMI Insurance’s board resolved that Government support be sought with all haste and that urgent steps be taken to pursue other capital-raising possibilities. This need was reinforced by an impending review of the company’s credit rating. On 21 March Treasury provided a letter of comfort to AMI Insurance noting that its request for Government support merited serious consideration and inviting the company to continue discussions. The company forwarded this letter to its credit rating agency A M Best Co. On 23 March A M Best downgraded AMI Insurance’s rating for its claims-paying ability two notches from A+ to A- on review with negative implications. There is little doubt that without some prospect of Government support the downgrade would have been greater and could have created significant uncertainty. On 28 March Cabinet delegated power to act jointly to the Prime Minister and me and to the Minister for Canterbury Earthquake Recovery. Yesterday we approved the arrangements that were announced today. 
The key terms of the agreement between the Government and AMI Insurance are that the company has paid the Crown a $15 million establishment fee. The Crown will receive board representation and in addition the Crown observers will have full access to the company’s operations. AMI Insurance has issued $500 million of unpaid convertible preference shares to the Crown with preferential rights to dividends. Payment will happen only if the company’s own resources are depleted below the level that is prudent for an insurance business or if at any time the Crown decides that it is in the public interest to make the payment. In exchange the Crown could take ownership of AMI Insurance and have control of the board. The Crown also has the option of taking ownership if necessary by making a partial payment of $100 million at any time. If the arrangement is called on by AMI Insurance and it later becomes clear that the company can pay all likely policyholder claims it will exit the support arrangement by repaying the Crown. The arrangement also provides for the maintenance of customer service standards by the company. 
The eventual cost to the Crown is impossible to know precisely. A plausible range extends from zero where current resources will prove to be sufficient to $1 billion. The potential $500 million injection will allow the company to keep operating and give it time to seek a long-term solution. Policyholders will be protected whatever the outcome. The arrangements mean that all claims by AMI Insurance policyholders will be met. 
AMI Insurance’s situation is unique so the Government entered this arrangement reluctantly. The company is the leading insurer in a region subjected to two earthquakes in short succession. Christchurch is an area where the company has a particular concentration of policyholders. Moreover because the company is owned by its policyholders it had little ability to raise new capital quickly. I can confirm that we know of no other large insurance company in a similar position. The insurance sector as a whole remains sound. The Government entered the arrangement reluctantly. There is a possibility that the Government may not have to inject capital at all. But if it does then it does not intend to become a long-term shareholder. None the less we are satisfied that this is the best possible solution and that it protects both those insured by AMI Insurance and taxpayers. The Government acted primarily because we cannot leave the people of Christchurch in the lurch in their time of great need. 
Hon DAVID CUNLIFFE (Labour—New Lynn) 
: 
 The Labour Opposition supports the need to provide certainty to the 85000 Cantabrians who have been worrying about whether their insurance claims for earthquake damage would be paid out. In that regard the Labour Opposition supports the Government’s provision of up to $500 million as an equity stake in AMI Insurance. The Labour Opposition hopes that the package will provide the confidence and certainty that Cantabrians need. The well-being of Cantabrians and their ability to rebuild their homes and lives must not be put at risk because of financial uncertainty. We understand the extraordinary circumstances of two earthquakes in the immediate region of the domicile of AMI which is New Zealand’s largest domestic-based insurance operation. 
The package must however be seen as a last resort. We noted that the Government has indicated that the $500 million will be drawn upon only as is necessary when all other legitimate claims on equity and financing have been exhausted. Safeguards must be put in place to protect the long-term interests of taxpayers. 
We note that in the Government’s statement what is being provided is “up to $500 million in equity” plus the following statement from the Government: “If losses were to be greater than $500 million the Crown would stand behind the claims.” We will be seeking more detail from the Crown on the nature and extent of this additional exposure and what information has been provided upon it by the company. We note that in the case of another prominent South Island financial institution the Government’s initial estimate of liability was of the same order of magnitude but has ballooned to nearly three times the original estimated amount. We want to ensure that better standards of oversight occur in this case. We put the Government on notice that as part of the Opposition’s support for this step we will expect ongoing consultation and sharing of information in respect of the company. 
Part of the reason for that is that New Zealanders are sick and tired of bailing out the private sector including finance companies which—let us say—in some other circumstances could have been seen as often reckless and/or greedy. Some companies have capitalised on the good times raking in profits but when they started making losses or going bust it has been left up to the taxpayer to rescue them. That is not a precedent we can allow to stand. It sticks in the throat of most New Zealanders. However on this occasion AMI Insurance is in a different situation that has come about through extraordinary circumstances. We accept that action has had to be taken to protect the interests of 485000 AMI Insurance policyholders throughout New Zealand especially those affected by the disaster in Canterbury. Thank you. 
GARETH HUGHES (Green) 
: 
 The Green Party supports the Government’s move to underwrite AMI Insurance a move that will give certainty to policyholders especially those in Christchurch needing to rebuild their homes and their livelihoods. Giving ourselves the option of taking a preferential shareholding in AMI Insurance is the most prudent way to bail out the company and will ensure that the interests of taxpayers are best protected. However the Government has itself admitted that the $500 million may not be enough to cover the full liability AMI Insurance is exposed to. With the Government committed to borrowing to fund this bail-out amongst a growing list of others the argument for an earthquake levy is now more compelling than ever. We as a nation have to be prepared for more bad news from the Christchurch earthquake. The Government needs to design a fiscally and economically resilient response. Putting it all on the credit card does not constitute a plan. Putting it all on the credit card leaves us less able to deal with future shocks to the economy. 
The Green Party has proposed a temporary levy on income as the fairest way to pay for AMI Insurance - like scenarios. Our proposed levy is fair it would fall on those most able to afford it and it would raise over $1 billion of additional revenue for each year it remained in place. The levy is a targeted tax one that would go directly to pay for the rebuilding of Christchurch. It is also a proposal that is widely popular. We commissioned UMR Research to test the waters and its poll results show total support for the temporary levy at 57 percent. Our plan to raise a temporary levy is smart economics. Raising additional revenues would significantly lessen the risk of a credit downgrade. 
The Minister of Finance’s office confirmed through an answer to a written question yesterday that the credit agencies will be reviewing New Zealand’s sovereign credit rating after the Budget. Standard and Poor’s and Moody’s currently have us on a negative credit watch. The Government’s latest bail-out of AMI Insurance simply increased the chance of a credit rating downgrade unless the Government shows some commitment to raising revenue to lessen its debt blowout. A credit rating downgrade would add significant dead weight of costs right across the economy—the last thing our fragile economy needs right now. 
The other part of the Government’s approach to paying for the rebuild of Christchurch is to cut public sector spending at a time of weak economic activity. This carries the great risk of sending an already fragile economy back into recession and a recession will further worsen our ability to repay debt and slow our ability to ensure that Christchurch lands on its feet sooner after this great disaster. 
A temporary levy avoids the risk of a credit downgrade and the risk of sending the economy into recession as it spreads the cost of funding the rebuild right across and fairly through the economy. In light of this new economic reality the smart pragmatic way to pay for rapidly increasing costs from the earthquake is to reconsider the raising of a temporary levy. We encourage the Government to do this. 
Hon Sir ROGER DOUGLAS (ACT) 
: 
 I have been warning the Government of this moment for the last 2 years. Here is what I said in March 2009: “All this talk of bailouts and the like undermine certainty. It suggests to business that the Government may begin to actively pick winners and losers. But such an approach is a recipe for disaster.” In normal circumstances the Government should not step in and bail out AMI Insurance. Certainty is essential to the operation of the market. Bail-outs undermine certainty by suggesting to business that the Government will start to actively pick winners and losers. In the case of AMI Insurance the company gained a larger market share than it might otherwise have done through offering lower premiums made possible by a policy of limiting expenditure—that is having too little reinsurance. AMI Insurance took the risk and those who took out insurance with it benefited from the risk for a while. It was a risk that did not work. If the Government is going to step in here what about the people in Canterbury who ran a similar risk by having no insurance at all? What is the Government going to do for them? 
The question however is what we do from here. We as New Zealand citizens might just—and I emphasise “just”—be able to go along with the Government’s decision to bail out AMI Insurance but only I suggest under strict conditions. If these conditions are not met then the bail-out in my view at least should not proceed. There need to be two non-negotiable conditions for this bail-out. First the Government must send out an unequivocal warning to all New Zealanders that the Government cannot afford nor will it entertain any further bail-outs. This is it! If New Zealanders want to try to benefit from running a risk they must be prepared to live with the consequences. The Government can no longer afford to pick up the tab. Second the Government must get its books in order. We need for example to get Government expenditure under control immediately. Going slow as we have done over the last 3 or 4 years is no longer possible. To boil it down the way that the Minister of Finance has run the economy over the past 2½ years and the risk that he has been prepared to take are not different in any way from the way that AMI Insurance has run its business. They both lived at the edge— 
Mr SPEAKER 
: The member’s agreed time has expired. 
TE URUROA FLAVELL (Maori Party—Waiariki) 
: 
 Tena koe Mr Speaker. Kia ora tatou. The Maori Party stands in support of the policyholders’ support package for AMI Insurance and we do so in taking a whanau approach. This is about protecting the interests of whanau: whanau in Christchurch and whanau elsewhere who have already faced significant costs from not just the earthquakes but the collapse of finance companies. This measure is about providing a level of confidence to us all that if financial assistance is required the Government will take extraordinary steps to minimise the cost to taxpayers. We will be watching very carefully to ensure that that happens. We are opposed to bailing out the private sector. 
The events emerging out of the Canterbury earthquakes have placed many sectors within our nation under great pressure. Today’s announcement responds to the considerable tension that AMI Insurance has experienced in direct response to the earthquakes last September and in February of this year. It is an unusual situation and from the viewpoint of the Reserve Bank it does not appear to have impacted on the bulk of the mainstream insurance sector only AMI Insurance. 
The Government has described the policyholders’ support package as a last-resort approach kicking in only when the company’s own reserves have been exhausted unless the Crown believes that it is in the public interest to take control sooner. This is about taxpayers supporting other whanau who through no fault of their own have sought support from a residential insurer that now finds itself in a precarious position as a result of two natural disasters on a massive scale. The Maori Party supports the Government in this initiative. 
Hon PETER DUNNE (Leader—United Future) 
: 
 The Christchurch earthquake and its associated events is a rare and extraordinary thing in the life of our country. So too the solutions to the flow-on problems that arise from it are rare and extraordinary as is evidenced by the decision with regard to AMI Insurance. This is not a case where ideological solutions from either the right or the left are appropriate but is one where what is appropriate is the best course of action in the circumstances—85000 policyholders in the Canterbury area cannot be cast to the wind in these circumstances. 
The parallel that I want to draw on which although different in context has relevance in terms of its extraordinary impact is the proper decision that this House made some years ago to bail out Air New Zealand. In that instance the Government of the day could not stand by and let a critical component of national transport infrastructure fail. In this instance the Government cannot stand by and see a large number of residential policyholders in the Canterbury area cast to the lions as it were simply because the pressure on their insurance company has proved to be too great. One other parallel with Air New Zealand which I just caution about in the context of the Christchurch bail-out is that at the time of the Air New Zealand bail-out the Government was confident on the basis of the information available to it that its involvement would be relatively short term and that it would start to withdraw from the level of equity that it purchased over time. In reality that has not happened and I suspect that despite the Minister of Finance’s optimism that this can be a relatively short-term involvement with AMI Insurance that will prove not to be the case as time unfolds. 
I think it is appropriate that we support AMI Insurance in this way. This is one of those rare and extraordinary occasions and this solution should be seen as being precisely in that category. 
Hon BILL ENGLISH (Minister of Finance) 
: 
 I thank the leaders of the various parties for their support for this unique and extraordinary measure. I reassure Parliament that the Government is not out looking for opportunities for these kinds of arrangements. I want to send a clear message to New Zealand’s commercial sector that only in unique circumstances would the Government contemplate supporting a commercial venture. They should conduct their business and their advice to consumers of their products in the usual method whereby they bear all the risks of the transactions they are undertaking. It is only the sequence of events of two earthquakes in Christchurch that merits the kind of support that taxpayers are offering to homeowners of the suburbs of Christchurch. The Government will endeavour to execute its responsibilities in a way that will ensure the claims are dealt with expeditiously and the taxpayers’ interests are protected.