More on AMI

I am surprised that no-one has mentioned the idea of a “bank run” on AMI in the comments to this previous post.  Surely the justification for government action is that, without it, non-claimants would pull out of AMI due to concerns about AMI’s stability following the quake.  If AMI was still SOLVENT but lacked sufficient LIQUIDITY to get through this period, they may fail for seemingly no reason.  As a result, the government comes in, provides liquidity, then disappears for no cost!

Now this is the ideal situation and justification that SHOULD have been provided.  All this crap (yes, I’m using a strong word 😉 ) about “giving certainty to the people of Christchurch” is politics in my opinion – they are selling an idea about the bail out being to support a community in an attempt to numb criticism as to whether this is the most appropriate way to help.

I can understand my opinions seem harsh, hell something has to be done right. Maybe something should be done, after all if we genuinely feel concern about the people of Christchurch and think that losses from such an event should be ALL socialised then we should pay for ALL the losses through higher taxes – not just the losses of people associated with one specific insurance company.

I am surprised to see the left come out in support of this.  What about the poor people who were living on the breadline and couldn’t afford insurance – the left is happy to support the middle classes who could afford insurance and are unwilling to take on the risk associated with it, while simultaneously not helping the genuinely poor.  This is the type of left wing view point I grew up hearing.

Yes, the left wing people I grew up with would want AMI bailed out – but they would also want national insurance for all the residents of Christchurch and they would want the Banks and insurance companies nationalised to avoid this “too big to fail” issue althogether (not saying I agree – but at least the views are consistent).

Did AMI need it

So the fact that the intervention is terribly targeted if it is meant to help anyone is one point.  However, lets also ask whether we need a implicit guarantee from government in this case.  Two points to think through:

  1. If AMI is insolvent then no guarantee is necessary – they need to value.  If they are suffering from liquidty, then a temporary loan at market rates of interest which they can choose to go for will be accepted – and all will be well.  This is why I’m confused that the government isn’t calling it a loan.  Another point on this is the the government should expect to lose a grand total of nothing if intervention is necessary.  However, if they are spending money to help provide “certainty for Christchurch” they would be better off … giving money to people in Christchurch, rather than bailing out a firm.
  2. Even if it is a liquidity issue, this doesn’t mean we should intervene.  What happens if another firm can buy them out.  This shows that they are solvent, and it ensures that government (and so society) doesn’t bear the risk – hell, the other firm would get the purchase for a good price, but that is just a loss for the shareholders of said company so who cares 😉 .  Now this is what got me annoyed – Tower is signaling interest.  Now instead of making this the “first port of call” the government has guaranteed AMI, meaning that the shareholders of AMI are unwilling to listen to a Tower offer – a sale should have been the FIRST thing the government looking into, but instead they are effectively BLOCKING one.

Now I have heard mummers they are thinking of a white knight investor now, etc etc – but can’t they see that how they have set up their policies is making this possibility more difficult, not easier.  Hopefully there is a switch of tack, the government can put the hard word on AMI to force it into a sale (if it is truly insolvent).  However, from where we are sitting now I find it important to lay down what I have found inappropriate around recent announcements.

Update:  Eric Crampton discusses here.

  • Miguel Sanchez

    Not sure where you’re going with this Matt. An insurer facing claims of as much as double its capital is insolvent, no question about it.

  • @Miguel Sanchez

    I would also say they are insolvent, yar.

    BUT, I wanted to make the case as broad as possible – so that if certain arguments are raised in favour of say the idea of a “bank run”, the assumptions behind that are a bit more transparent.

  • Dismal Soyanz

    The bailout was political. If the insurer failed then the homeowner has no financial support to repay the mortgage. Mortgagors (and I assume this would primarily be banks would then be foreclosing on homeowners. This would be fairly unpalatable for the banks – partly because any value they could get from the ruined buildings would be low but also because of the residual amount owing having to be extracted from now-homeless Christchurch residents. Not a good look. Definitely a vote loser in an election year.

    IMO, the Government should have killed AMI. Transfer its balance sheet to a special purpose entity set up for this alone. Liquidate all other assets (whether it be selling individual assets or portfolios) and fund the SPV to cover the ChCh mortgages. AMI has been run into the ground by the current management and its really hard to see what value they (and the AMI brand) actually have any more, despite Blamforth’s protestations.

    How anyone could ever believe that AMI could be a going concern is beyond me. The management has shown an inability to manage risk and its balance sheet as a prudent insurer. That’s bad enough for any company, but for a business that is meant to live and breathe risk management, it borders on gross negligence.

  • more_ben

    Another point on this is the the government should expect to lose a grand total of nothing if intervention is necessary. However, if they are spending money to help provide “certainty for Christchurch” they would be better off … giving money to people in Christchurch, rather than bailing out a firm.

    Here’s a theory: vote share is increasing with government spending, without limit, on anything remotely plausible. If correct, then English’s decision to present the worst possible scenario and going along with calling it a bailout makes sense: being seen to spend $1 billion more gets you more votes on election day come November, more than if you’d announced you will probably spend nothing.

    I have no idea why this theory might be true, but I nevertheless suspect it is.

  • jh

    I had minimal damage to my house and haven’t made a claim. I have all my insurances with AMI and I was shocked (but not entirely surprised) when I heard they were in trouble. I pondered what I should do and thought “oh well’, I’ll just reinsure early with another company”. At the moment I’m waiting and when I see the new prices I’ll think about changing, but otherwise I’ll stick with AMI (out of loyalty and a sense of doing the right thing).

  • jh

    So, just to add the thought occurred to me that AMI rely on my continued support.
    We need to remember that Canterbury is on an alluvial plain and the earthquakes started off with a hidden (blind) fault.

  • Dismal Soyanz

    @jh
    A hidden fault doesn’t excuse the excessive exposure to Christchurch property that brought AMI to its knees. The mantra for any insurance company is diversification. In this respect AMI, as Generation Twit put it, #fail.

    Yes AMI rely on your continued support, in much the same way as any bank relies on depositor confidence or even a Ponzi scheme relies on increasing numbers of (foolish) punters. The question you have to ask yourself is whether you actually have confidence that AMI have learnt from ChCh. If you believe so, then carry on with AMI – after all, the government may step in to bail them out again [Moral hazard – a game any NZ company can play]. If not, look elsewhere.

  • Miguel Sanchez

    jh :At the moment I’m waiting and when I see the new prices I’ll think about changing, but otherwise I’ll stick with AMI (out of loyalty and a sense of doing the right thing).

    So… you’re going to wait and see whether they continue to undercharge for risk before deciding whether to keep your business with them. Are you sure that “loyalty” is the motivation here?