Ratings agency AM Best remains concerned about the price of reinsurance for New Zealand mutual insurer AMI Insurance, and will continue to monitor the company.

Christchurch-based AMI was forced to accept a rescue package from the New Zealand Government last week after fearing its $NZ600 million ($445 million) reinsurance for the second earthquake might not be enough to meet claims.

The Government has offered AMI $NZ500 million ($372 million) under a deal that allows the state to take over the insurer by paying $NZ100 million ($74 million).

AMI is New Zealand’s second-largest residential insurer with 485,000 policyholders and 1.2 million policies. It has more than 85,000 policyholders with 225,000 policies in Christchurch, about 35% of the city’s residential insurance market.

The insurer is in the process of renegotiating its reinsurance treaties from June 30, and AM Best Associate Director Stella Ng told insuranceNEWS.com.au that while reinsurance will be available “it is a matter of price”.

“AM Best expects an increase in reinsurance premium and this could put pressure on the company’s profitability, if [the] price increase is not fully transferred.”

The agency last month downgraded AMI’s financial strength rating to A- (excellent) from A+ (superior) and its issuer credit rating to a- from aa, saying then that it was concerned with AMI’s risk management in relation to its aggregate catastrophe exposures.

Ms Ng says the Government’s support partially addresses AM Best’s concerns. When it downgraded the ratings it was aware AMI was pursuing capital-raising options and was provided with a letter of comfort to AMI from the New Zealand Treasury noting the company’s request for state support merited serious consideration.

New Zealand Finance Minister Bill English says the package will be called on as a last resort if the insurer’s reserves are exhausted, unless the Government believes it is in the public interest to take control of AMI sooner.

He says if AMI’s losses rise above $NZ500 million, the state “would stand behind the claims”.

The Government agreed to the bailout to ensure the orderly rebuilding of Christchurch and it could take up to 18 months to know whether the rescue money is needed.

“This support package will give AMI the time to seek a market solution to the challenges it faces as a result of the two Canterbury earthquakes,” Mr English said.

AMI approached the Government on March 9 because it was concerned its reserves and reinsurance might not cover the two earthquakes.

CEO John Balmforth says the speed of the Government response gives AMI time to find a solution from the commercial sector. He says that as a mutual, the company has no access to shareholder funds, but it will consider selling the business as a going concern or offering shares to a reinsurer.

Tower NZ has said it is interested in buying AMI.

Mr Balmforth says it could be a couple of months until the final cost of the second quake is known.

“Uncertainty about the final claims tally has translated into uncertainty about AMI’s ability to pay,” he said. “We could not allow such concerns to mount and it was for this reason that we asked Government to stand behind us during this difficult period.”

Mr Balmforth says AMI has more than $NZ350 million ($258 million) of reserves. The first earthquake was well within its resources with claims of $NZ450 ($333 million) and reinsurance of $NZ600 million, and modelling had showed the $NZ600 million of cover for the second event would be adequate.

“The second quake, while less powerful, was more destructive so we believe the additional $600 million reinsurance we have for that quake will be tested,” he said. 

AMI has $NZ1 billion ($742 million) of cover to meet a third event and additional back-up cover to meet a fourth event should they occur before June 30.

Ms Ng says AM Best has been reviewing AMI’s rating in light of the Government rescue, and discussions will continue regarding back-up capital plans.

“For every major corporate action a company takes, AM Best will monitor the situation closely and take rating action accordingly when necessary,” she says.