AMI Insurance (AMI) had 1.2055 million policies as of June 30, 2011, representing NZD 25.4 million (investment income) in profit and assets of NZD 2.3 billion (2011). (See http://www.ami.co.nz/Documents/Annual%20Report/2011/AMI%202011%20Year%20in%20Review-v21.pdf).
AMI was the second biggest residential insurer in New Zealand until recently, and was New Zealand owned. It had 485,000 policy holders with 1.2 million policies including 51,000 in Christchurch. AMI had more than 30 per cent market share of the fire and general insurance market in Canterbury. Because of AMI’s much higher market share in Christchurch it was exposed to much larger losses than had the event occurred in Wellington. It was initially downgraded by credit rating agency AM Best Co. from ‘A plus’ to ‘A minus’ due to the possibility that it might require additional capital to cover the quantum of claims from the February 22, 2011 quake. It is said to have had NZD 600 million reinsurance cover for the 22 February, 2011 Christchurch earthquake event and also NZD 350 million of reserves. AMI was a mutual i.e. owned by its policy holders with no shareholders or parent company, before its sale to IAG. After the Canterbury earthquakes it was in need of a ‘bail-out’ by Government in the form of a guarantee which came in the form of a Crown support deed, to the tune of NZD 500 million. (See http://www.stuff.co.nz/business/money/4856873/Quake-hit-AMI-insurance-bailout-could-cost-1-billion).
AMI subsequently reported a NZD 705 million annual loss and breached its Crown support deed arrangement through a NZD 76 million shortfall of its NZD 198.6 million regulatory capital requirement. (See http://www.interest.co.nz/news/57305/iag-taking-out-mutual-competitor-ami-would-create-near-duopoly-merrill-lynch-analysts-say).
It has been suggested that because it was a ‘mutual’ it had no one to call on in its time of need and hence found itself in financial difficulty. AMI was also restricted to collecting premiums in New Zealand and consequently required more reinsurance than some of the other insurers. Had the Government not bailed AMI out there would have been chaos within the insurance industry sparking massive confusion and even further delays in the Christchurch rebuild. AMI was expected to complete 2000-2500 rebuilds and repair projects related to the Canterbury earthquakes.
The question arises: how is it that AMI was able to run a level of reinsurance that was well below the level that most New Zealand insurance companies would deem prudent and good business practice? On 16 December 2011 Insurance Australia Group (IAG) purchased AMI, which was said to ‘strengthen the Canterbury insurance market and reduce the Crown’s liability‘, according to the Finance Minister, Hon. Bill English. This sparked serious questions around AMI and its responsibilities toward policyholders. Whether it strengthens the Canterbury insurance market is highly debateable.
AMI directors failed to inform its policyholders of its intention to sell the company, stating that it had set up a holding company and in so doing skirted around its legal obligations toward its policyholders to inform them of its business decisions to sell the business. (See http://www.stuff.co.nz/the-press/business/6164983/AMI-sale-done-without-consulting-members).
Clearly there is a regulatory loop here that requires filling.
AMI was a mutual insurance company. This means that it had no independent shareholders but was owned entirely by its policyholders. The rights of policyholders include voting for the board of directors and other major business decisions that affect the company’s future direction or structure, such as a proposal to demutualize or sell the company. Given that the directors had a duty of fidelity and an obligation to inform, in my opinion, the events that have taken place are dubious at best, particularly the arguably ‘covert’ establishment of a ‘holding company’. The AMI board faced angry policyholders at its annual meeting with one calling the prospective purchaser, IAG, “the worst insurer in Australia“. (See Board gets flak over IAG deal, Marta Steeman, The Christchurch Press, December 21, 2011.)
Tower also placed a bid for AMI which was to fail. (See http://www.stuff.co.nz/business/industries/6386436/Tower-explains-failed-AMI-bid). The Crown has now taken over ownership of AMI’s Canterbury earthquake related claims along with its reinsurance and it will be retained as a new Crown company which will continue to manage AMI’s customers’ earthquake claims. (See http://tvnz.co.nz/business-news/ami-sold-govt-takes-all-quake-claims-4651837).
The Government went on to create a new Crown entity- Southern Response Earthquake Services Ltd which is the renamed residual parts of AMI Insurance that are to remain in Government ownership once the sale of AMI Insurance’s non-Christchurch earthquake related business is finalized. The Government announced Ross Butler as chairman in 2011.
IAG paid NZD 380 million for AMI’s brand and branch network and nationwide insurance business of almost 500,000 customers holding some 1.2 million insurance policies, mainly on houses, contents and cars. IAG 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. IAG consequently currently covers 60 per cent of the Canterbury market, which raises serious questions for the Commerce Commission. The Commerce Commission published its Statement of Preliminary Issues regarding the IAG / AMI purchase on 25 January 2012. (See http://www.interest.co.nz/sites/default/files/Statement-of-Preliminary-Issues-IAG-AMI-25-January-2012.pdf)
The Commerce Commission has said,
“We will give clearance to a proposed merger only if we are satisfied that the merger is unlikely to have the effect of substantially lessening competition in a market.”
This involved determining what the relevant market was, including a determination of where the banks fit into the picture, in terms of existing competition, potential competition, the countervailing market power of buyers and coordinated behaviour, – that is, whether the acquisition would enhance the ‘ability of market participants to collude whether tacitly or explicitly’. (See http://www.interest.co.nz/news/57602/commerce-commission-mull-banks-role-insurance-part-decision-whether-clear-iags-nz380-mln– ). IAG’s purchase was ultimately subject to the Commission’s regulatory approval. The claims liability of AMI of NZD 1.8 billion is offset by about NZD 1.3 billion in reinsurance and further reduced by the NZD 380 million purchase price agreed by IAG. As a result Treasury estimated that the Crown’s liability would drop from NZD 335 million, in the last published set of full-year Crown accounts, to about NZD 120 million. (See http://www.beehive.govt.nz/release/crown-manage-ami039s-earthquake-claims).
AMIs outstanding claims workload has been taken over and managed by the Government-owned company Southern Response, which has about 160 ex-AMI staff. Southern Response is based in Christchurch and is backed by the Crown Support Deed to settle earthquake claims. (See http://www.stuff.co.nz/the-press/news/christchurch-earthquake-2011/6700101/IAG-takes-over-AMIs-500-000-customers).
Do you think that IAG should have been permitted to purchase the assets of AMI ? Who really picked up the tab- the tax payers??