Editorial: AMI collapse is simply unthinkable
Poor old Bill English. All the finance minister wants to do is sell things and all he ends up doing is bailing out failed private businesses.
Poor old taxpayers. They end up paying bills that run into the billions for those failures.
Fresh from announcing that the Government will be spending $300 million more than it expected to meet its guarantees on Allan Hubbard's South Canterbury Finance – the bill for that is now approaching $1 billion – Mr English announced yesterday that taxpayers may end up having to fork out up to another $1 billion.
AMI Insurance got its sums wrong and failed to provide adequately for events such as the Christchurch earthquakes.
Mr English, and taxpayers, are entitled to feel aggrieved. AMI chief executive John Balmforth said just after the February earthquake that it was the worst disaster his firm had faced, but that there were no issues, proclaiming, "I'm completely confident we can cover this".
That confidence was all too evidently misplaced. Some will say AMI could not have foreseen that it would be paying out large sums as the result of two earthquakes, but it is in the business of insuring against unlikely events. It should have taken a lesson from its customers and protected itself.
Ideally, the company would be left to face the consequences of not reinsuring sufficiently and it would be allowed to fail.
However, that is simply not possible. AMI has more than 85,000 policyholders with 225,000 policies in Christchurch – about 35 per cent of the residential market in the city.
Ambiguity over whether claims on those policies would be fully paid out would make decisions on the rebuilding of the city difficult, and cause delay till AMI's financial situation was clearer.
That, Mr English acknowledged, could have been several months away. Delays of that order would have disastrous consequences for the whole country, which needs to have the city functioning as normally it can again as soon as possible.
Then there is the disruption that would be caused through the rest of the country if New Zealand's second largest insurance company failed.
Given that it had no choice, the package the Government has put together is as good as it could be.
There is the consolation that if taxpayers do end up putting in money there is a possibility of a return.
The bailout requires AMI to pay a dividend on convertible preference shares paid for by the Government. Whether an AMI that needs to call on Government support would have the ability to do so is a moot point.
There is still a faint hope that AMI will not in the end need any Government money and could cover its claims from its own resources and continue in business, with just the promise of a Government back-up providing enough confidence to allow it to achieve a commercial solution.
The Government finds itself in an invidious position. Once again it has had to come to the rescue of a private concern that is "too big to fail". The bill, if there is one, will fall to taxpayers.
The Dominion Post