At first glance, New Zealand’s second-largest home and contents insurer AMI should be attractive to another insurer wanting to buy a customer base of 485,000 clients and about a third of the Christchurch market.

It has premium income of around $NZ360 million ($275 million) and normal net claims of around $NZ187 million ($143 million). Under its recapitalisation plan the “normal” business will be ring-fenced from its toxic earthquake claims.

But industry figures who have spoken to insuranceNEWS.com.au on condition of anonymity say AMI is undercutting competitors and they believe it cannot be saved in its current form because any business outside Canterbury has been written on rates that are unsustainable.

“Why would anyone want to buy a book that is written too low?” was one comment. Another says AMI has imposed only small or no premium increases since it got into trouble, and “their behaviour will turn off possible acquirers”.

Critics say AMI is continuing to underwrite too low. They say its board is light on insurance expertise, and that it had inadequate reinsurance and too much exposure to Christchurch risks.

But in a written response to insuranceNEWS.com.au, the mutual says it has been consistently profitable and was on track to make a record profit for the year ended June 30 this year when the earthquakes arrived.

“AMI has been increasing its premiums recently to take into account the increased costs of reinsurance, as have other insurance companies operating in New Zealand,” the statement says. “Any potential investor will make their own assessment of the value of AMI, its potential and its fit with an investor’s current and planned activities.”

One informed source says reinsurers are looking to all New Zealand insurers to show responsibility in pricing so risk is being handled properly, and that AMI should be raising premiums to reflect the risk.

“AMI needs to be showing that they’re looking after their reinsurers’ interests in the way they price their products,” he said. “That’s important to the whole market, because we can’t afford to have any doubt that New Zealand insurers aren’t supporting their reinsurers.”

The Christchurch-based mutual has been able to negotiate more reinsurance and has more than doubled its catastrophe cover. For this financial year, it has paid $NZ52 million ($40 million) to buy $NZ1.4 billion ($1.06 billion) of reinsurance and negotiated an automatic prepaid reinstatement cover of up to $NZ1.3 billion ($99 million) should the first cover be called on.

AMI incurred $NZ760 million ($580 million) in earthquake claims, post-reinsurance, in the year to June 30 – the period of most significant earthquake damage. It has calculated it faces $NZ531 million ($406 million) in claims over and above reinsurance. 

These claims will not pass onto any acquirer or “white knight”, but will be split out, AMI says, with adequate resources and in a way that protects the interests of all parties.

The record profit AMI was expecting to make this year was wiped out by the earthquake losses, pushing it into a $NZ705 million ($538 million) net loss compared with a $NZ32 million ($24 million) profit in 2010.

Shareholders’ funds dropped to $NZ139,395 ($106,500) from $NZ369,300 ($282,000) and only stayed positive because the calculation included a $NZ500 million ($382 million) bailout from the Government in April – although AMI has not in fact drawn upon that money. 

Even then, the insurer’s capital adequacy has fallen below the minimum required under the support agreement and is a trigger event for the Government to take ownership of the group. With a sale process under way, the Government has not exercised the right.

There are some certainties from the current process: AMI’s 500,000 policyholders will get nothing and the New Zealand Government does not want to end up owning AMI.

The Treasury has accounted for a liability of $NZ337 million ($257 million) from the rescue package in the Government’s financial statements, but the final outcome will depend on the sale price.

Although Canterbury was regarded as a low earthquake risk prior to the earthquakes, AMI’s risk as a company was heightened by its concentration in one area of the country, and critics say it did not buy enough reinsurance to cover its risk.

The February earthquake has been assessed as a one-in-2500-year event, and AMI says every insurer operating in the Canterbury market has taken a heavy hit from the earthquake series.

“AMI’s reinsurance package, which provided for $NZ600 million ($459 million) for each major event (in the year to June 30), was in excess of the level recommended by AMI’s reinsurance brokers on the basis of industry standard catastrophe and earthquake models,” the statement to insuranceNEWS.com.au says.

The Government came to the insurer’s rescue to ensure the orderly rebuild of Christchurch, but the rescue has annoyed many in the industry who feel AMI still doesn’t have enough insurance expertise on its board and is now making the most of its government guarantee to compete.

AMI counters that most of its directors have long-standing positions on the board and are familiar with all aspects of the management of a personal lines insurer.

“The chief executive [John Balmforth], who negotiated AMI’s reinsurance contracts, has done so for over a decade,” it says.

AMI offers any buyer an instant presence in the Canterbury market, where the tremors have started to taper off. Construction regulations are tightening and the most vulnerable buildings have fallen down or been demolished.

In normal circumstances AMI’s customers might desert to a rival, but in Christchurch they are effectively locked in, since insurers are reluctant to write any new risk until the aftershocks stop. 

The recapitalisation process is proceeding, and AMI says an announcement will possibly be made in the next few months. Given the criticism of the insurer within the industry and the questions over the value of its client book, potential buyers will be approaching AMI very carefully.