IAG's agreement to purchase AMI Insurance, announced today, will strengthen the Canterbury insurance market and reduce the Crown's liability, Finance Minister Bill English says.
As part of the deal, the Crown will take over ownership of AMI Insurance’s Canterbury earthquake related claims.
"The part of AMI dealing with earthquake claims – along with its reinsurance for those events - will be retained as a new Crown company and will continue to manage AMI's customers' earthquake claims," Mr English says.
"This will ensure those claims are managed effectively and with the minimum of disruption.
"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. We welcome this assurance, which will ensure ongoing insurance cover for 60 per cent of the Canterbury market.
"For earthquake affected AMI policyholders, this means their existing earthquake claims will be managed by the new Crown company, while the IAG group will manage their ongoing insurance cover. For AMI policyholders around New Zealand, the IAG group will manage their insurance cover."
The agreement is subject to regulatory approval, including from the Commerce Commission.
"In April the Government said it would provide back up financial support for AMI to give policyholders certainty and to ensure an orderly rebuild of Christchurch while AMI sought a market solution to its challenges," Mr English says.
“Now that AMI Insurance has found a new source of long-term capital, the Government will take over ownership of AMI's estimated $1.8 billion of earthquake related claims, consistent with the AMI support deal."
This claims liability of $1.8 billion is offset by about $1.3 billion in reinsurance and further reduced by the $380 million purchase price agreed by IAG.
As a result Treasury estimates that the Crown's liability will drop from $335 million, in the last published set of full-year Crown accounts, to about $120 million.
The Government has appointed Nelson-based company director Ross Butler to chair the new Crown company. Mr Butler has a background in finance and insurance-related companies and is currently chairman of Nelson Marlborough Institute of Technology and deputy chairman of GNS Science.
"The Government has made it clear that helping to rebuild Christchurch is one of its most important priorities. Today's announcements will help meet that goal," Mr English says.
Questions and answers
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:
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.