Questions & Answers - AMI Secures Capital Support

Questions & Answers - AMI Secures Capital Support

7 April 2011

1. Overall position

On February 22 Christchurch sustained enormous damage. Around 35% of residential properties in Christchurch are insured by AMI. The level of claims, while not yet known, will be unprecedented.

Recognising the potential scale of the impact on AMI, AM Best our rating agency, put us on watch and made a modest downgrade to our rating – from A+ superior to A- excellent.

To maintain customer confidence in the company we have entered into an arrangement with Government whereby we can draw down additional capital to meet claims should that be necessary.

2. Will it be necessary to access these funds?

At this stage the ultimate loss is still unclear and it may take till as late as June before a more certain position is known. It was in the face of this uncertainty that we sought back-up from Government. At a time like this our customers want absolute certainty that they will be paid. The involvement of Government removes any doubt – they will be paid and the company will continue to trade normally.

3. Why is the final total of claims still so uncertain?

This is not a straightforward matter. It is complicated by what is covered in the first and second earthquake (they are treated as separate events for insurance and reinsurance purposes), whether additional damage caused by the quake will attract further EQC cover and decisions about remediation of land and/or relocation.

4. Will AMI be able to meet its claims without Government having to put in money?

We have a high level of reinsurance at $600 million. By comparison, we had the same amount for the first quake and claims costs are stable around $450 million. The second quake, while less powerful, was more destructive so we believe the additional $600 million reinsurance we have for that quake will be tested. In addition, we have reserves in excess of $350 million.

There’s a very good chance that we will be able to meet the claims ourselves, but there is uncertainty and by entering into the relationship with Government that uncertainty has been removed.

5. Should AMI have had more reinsurance?

Hindsight is a wonderful thing. Sitting here now we would love to have had more reinsurance. We are conservative insurers and our reinsurance requirements were carefully modelled after the first quake. Nobody expected such a destructive earthquake.

6. Are you happy with the arrangement with Government

We are very grateful that Government is providing support. We turned to Government in the first instance in the interests of time. We were looking for a wholly commercial arrangement and that’s what we have got. In other circumstances we would have sought support from the commercial sector, and still will, but in these circumstances Government can move faster and time is of the essence.

7. Does this arrangement, if it proceeds, mean you are owned by Government

With the signing of the arrangement we are giving Government access to convertible redeemable preference shares. If we draw down $100 million or more under this facility, then the shares become ordinary shares and Government takes an ownership of AMI.

8. Are you concerned about the loss of ownership?

We would want to avoid using the Government’s money if we could, but we won’t know the final position for some time.

9. Does this mean you would no longer be a mutual?

If we drawdown $100 million that would be the case, at least temporarily. Once this challenging period is over Government could allow us to buy the company back, thus restoring current arrangements. We could enter into an equity arrangement with a reinsurer or the company could be sold as a going concern. These are all considerations once the current earthquake-related challenges are resolved.

10. How long would Government be involved ?

The agreement provides for up to five years, but it could be a lot less.

11. Will premiums go up?

This arrangement will not, of itself, raise premiums, but the legacy of the two earthquakes, particularly their impact on reinsurance costs and the higher risk rating of the Canterbury area will inevitably result in higher premiums across the country and industry, not just AMI.

12. What does this do to your rating from AM Best?

AM Best placed us on watch in light of the uncertainty on the loss development. With the involvement of government the uncertainty is removed. We hope they will act accordingly. They will be reviewing the situation in May.

13. What if there is another event?

AMI has further reinsurance cover of $1 billion for the next event should one arise and up to $600 million if a further event occurs before 30 June 2011. AMI will have new reinsurance treaties in place for events following 30 June 2011.

14. When does AMI’s reinsurance cover end and what will AMI do if it cannot secure further reinsurance?

Our reinsurers have supported us strongly in the past and have provided increases in our reinsurance catastrophe cover for the current financial year. We are in ongoing discussions with our reinsurers about our future cover and we expect to agree treaties before 30 June 2011.

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