English Bill: Ministerial Statements — AMI Insurance—Financial Support Package 
Text is incorporated into the Bound Volume 
English Bill: Ministerial Statements — AMI Insurance—Financial Support Package 
[Sitting date: 07 April 2011. Volume:671;Page:17825. Text is incorporated into the Bound Volume.] 
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.