AMI Says Earthquake Claims Will Be At Top End Of The Range

AMI Insurance Says Earthquake Claims Will Be At Top End Of The Range

AMI Insurance says the cost of claims resulting from the Canterbury earthquakes, over and above the company's available reinsurance, is likely to be about $531 million, in line with earlier estimates.

Announcing its results for the year to June 30, 2011, AMI says it is also providing an additional $229 million risk margin (contingency sum). Almost all of the costs relate to the February, 2011 earthquake.

The calculations of the likely cost of claims and a prudent contingency sum have been provided by an international actuarial consultancy commissioned by AMI. They take into account the recent upward revision by the Earthquake Commission of the number of house claims they expect to receive over their maximum level of cover.

"These calculations are the best estimates available, but it will be the middle of next year before the company has reliable projections based on resolution of claims to that point," says AMI Chairman Kerry Nolan.

The calculations of net earthquake claims and the recommended contingency sum have been included in the company's annual accounts to June 30, 2011, resulting in an after-tax loss of $705 million.

AMI has $2.3 billion in assets including $1.2 billion of available reinsurance receivable, its own cash and investments and the unpaid $500 million of Crown capital committed to the company by the Government in April. The Government agreed to contribute the capital, if needed, to enable the company to use its own cash and investment assets of some $400 million to help meet earthquake claims.

"AMI continues to trade strongly. We are able to pay all normal day-to-day and earthquake claims as they are settled," says Mr Nolan. "We have effectively set aside $760 million, which includes a large contingency, to pay earthquake claims as they are settled over the next few years and have already paid out $80 million."

ANNUAL RESULTS

Announcing AMI's annual result for the year ended June 30, 2011 Mr Nolan says the company would have made a record profit but for the impact of various earthquake-related costs during the year, and the need to make provision for the future payment of earthquake claims.

Instead, AMI has recorded an after-tax loss of $705 million compared with an after-tax profit of $33 million in the previous year.

Gross written premium income of $362 million for the year compares with $341 million in the previous year.

"Almost all of the loss has been caused by claims related to the February earthquake, rated as a one in 2500 year event. This was the most damaging disaster in New Zealand's history and, I believe, the most expensive insurance situation to occur in any country relative to GDP.

"In making provision in the accounts to June 30, 2011 for future claims, we believe we have allowed for worst-case scenarios and added an appropriate contingency sum, but only time will tell what the final figures will be."

Mr Nolan says AMI is confident about its trading situation and expects to show a trading profit in the current financial year.

"In the meantime we are strongly focussed on continuing to run a major New Zealand insurance company providing secure cover for almost 500,000 New Zealanders, and we are able to meet all valid claims."

PAYMENT OF EARTHQUAKE-RELATED CLAIMS

Mr Nolan says finalising earthquake related claims is a very complicated and time-consuming process, as policyholders have a variety of options. These depend not only on the terms of their policies, but also on Government decisions being progressively announced for each "land zone" and the need for AMI to work closely with the Earthquake Commission, Local Authorities, the Canterbury Earthquake Recovery Authority and the Government.

"Some properties have had to be assessed more than once, having been damaged in successive earthquakes. In many cases repairs have been deferred until there is more confidence that seismic activity has ceased. There is still considerable uncertainty in Canterbury.

"We estimate just over one-third of claims will be paid out in the coming year, a similar amount in the June 30, 2013 year and about 20 per cent in the following year. I emphasise that all claims will be paid as they are settled."

AMI has recruited nearly 200 people to join its dedicated Earthquake Recovery Team which is helping customers with their earthquake related claims. AMI has also engaged Arrow International to help expedite assessments of more than 7000 houses and project manage their repair or rebuild.

IMPACT OF EARTHQUAKES ON COMPANY

Mr Nolan says the growing impact of the earthquakes on the company's resources will be felt in both the current financial year and the following two years year as the payout of claims gathers pace and the company begins to supplement the available re-insurance with its own investment assets in the year ending June 30, 2013.

"For the September 2010 earthquake claims will slightly exceed the $600 million of reinsurance available for that event. Claims related to the February earthquake are expected to exceed the $600 million of re-insurance available by a very considerable margin. Immediately after the February earthquake, the company purchased extra reinsurance of $1 billion. This meant that claims relating to the June earthquake will be very comfortably covered by our reinsurance.

"We will have more accurate projections by mid 2012, when most assessments will have been completed and enough rebuilds will be in progress to give a reality check on previous estimates of project management costs and inflation in labour and building product costs."

RECAPITALISING THE COMPANY

AMI has established a Board Committee to oversee the capital restructuring of AMI by attracting a new investor and has appointed Goldman Sachs as advisers to help raise new capital.

"Several potential investors have already made approaches and the Board looks forward to a successful outcome. A process will be adopted which ensures that AMI's ongoing business is ring fenced from its earthquake liabilities.

"We are grateful for the 'Backstop' Agreement, announced in April, for the Government to contribute $500 million in capital if needed," said Mr Nolan. "Their strong support as we work through the process of recapitalising the company has been invaluable and is contributing greatly to the orderly resolution of the Canterbury earthquake claims.

"The Crown has already been issued with convertible preference shares in AMI enabling the company to draw down the $500 million when it is needed. The recapitalisation process the company is undertaking is expected to resolve a requirement in the Crown Support Deed for the company to have a minimum level of capital.

"This Agreement gives us breathing space to seek new capital in a manner that maximises the value of the company. We are very hopeful we will be able to conclude an acceptable transaction."

OUTLOOK

AMI believes the prospects of recapitalising the company and strengthening its balance sheet, by attracting a new investor, are positive. In the uncertainty following the earthquakes the company says it has maintained customer numbers, and is continuing to win new business. While insurance premiums are increasing as a result of the increased cost of reinsurance, customers understand that this is inevitable due to recent catastrophic events around the world including the Canterbury earthquakes, Japan's tsunami, Australian floods and tornadoes in the United States.

AMI has reinsurance in the current year of up to $ 1.4 billion for any major event in New Zealand.

AMI is a major insurer of homes in Canterbury, where the company originally began business in 1926.

AMI is the largest wholly New Zealand owned fire and general and personal lines insurance company. It has a current financial strength rating of A - (Excellent) from international rating agency A.M. Best Company.

The company has 73 branches, two contact centres and 21 agencies throughout New Zealand (the largest network of any insurance company), nearly 1000 staff, and around 500,000 New Zealand customers holding 1.2 million policies.

ENDS

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