FINANCE

AMI Insurance sets out on recapitalisation programme

Thursday 12 May 2011, 11:15AM
By AMI Insurance
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AMI Insurance has begun the process of recapitalising the company to strengthen its balance sheet in the wake of the February earthquake.

Although all claims are not yet in, the company believes they will exceed the $600 million of re-insurance cover it holds for that event.

AMI’s recently announced arrangement for the Government to provide up to $500 million in extra capital, if necessary, has freed the company to use its own capital of $350 million to meet claims once the $600 million of existing reinsurance cover has been exhausted, without breaching the regulations governing the insurance industry.

“This arrangement means that every AMI policy holder, not just those affected by the Christchurch earthquake, can be completely confident that their claims will be met”, says Chairman Kerry Nolan. “We do not have a cashflow problem, but we need to address the company’s capital structure for the long term.”

Fresh capital, once raised, will enable the company to redeem the unpaid convertible preference shares it issued to the Government as part of the recently announced support arrangement, before any Government money is actually drawn down.

The company has appointed Goldman Sachs to advise it during the recapitalisation process and capital raising process.

“We invited submissions and considered proposals from a number of leading capital advisors. Based on the programme Goldman Sachs presented and their experience in this area, we have every confidence they will provide the Board with a suitable solution.”

Mr Nolan says there are a number of capital raising options available to AMI. Given the complexity involved, Goldman Sachs will assist in determining the level, type and structure of capital required to both settle claims and to satisfy the prudential regulatory requirements the company must meet now and into the future.

The recapitalisation project will take some months because AMI needs to determine the extent of its liabilities arising from the February 22 earthquake. This cannot be achieved until after the May 22 deadline for lodging earthquake related claims has passed, and current uncertainties around remediating earthquake damaged land are resolved. AMI expects to be able to quantify its exposure by the end of August, which will clarify its need for fresh capital.

Mr Nolan urged all AMI Christchurch policy holders affected by the February earthquake to be sure to meet the May 22 deadline for submitting claims to the EQC.

It is only the claims arising from the February 22 earthquake that have created the situation where AMI needs to recapitalise. AMI can comfortably meet all claims relating to the September 2010 earthquake from the reinsurance cover applying to that event, which has been classed as a 1 in 1000 year event. The February quake has been classified as 1 in 2500 year event.

AMI holds further reinsurance of $1 billion to cover a third disaster event in New Zealand before June 30, as well as current cover of up to $600 million for a fourth event before that date. Chief executive John Balmforth is currently overseas negotiating fresh reinsurance to take effect beyond June 30, which will include specific cover for earthquake events.

Established in 1926, AMI is a mutual, owned by its policyholders. It is the largest wholly New Zealand-owned insurance company, with 70 branches throughout the country, and more than 450,000 customers holding some 1.2 million policies.

Mr Nolan said that, despite recent negative publicity, healthy new business continues to be written with a net loss of fewer than 1% of policies since 22 February.

“With the welcome back-up arrangement negotiated with Government to supply further capital if needed, our customers can have absolute confidence that their claims will continue to be met, both now and in the future.”