Never mind the Christchurch earthquakes – a failed Queenstown insurance company was a financial basket-case anyway, Treasury and Reserve Bank reports say.
The official indictments of Western Pacific Insurance come in previously secret paperwork released last Thursday.
In a March 17 report, the Reserve Bank brands Western “illiquid and insolvent”.
The bank, which licenses insurers, puts the boot in: “Our assessment, from public information, prior to the February earthquake was that the company would struggle to be licensed as an insurer continuing to write new business.”
Further – predicting Western’s imminent collapse – a March 31 Treasury report says: “The underlying cause of [Western’s] probable failure is not considered to be the Christchurch earthquakes but more its under-capitalisation and its cashflow business model.”
The statements appear to contradict Western co-owner and prominent Queenstowner Graham Smolenski’s April 4 announcement to Mountain Scene about Western’s liquidation.
“The first earthquake we handled OK but the second one had huge implications for us with reinsurance,” Smolenski said at the time.
The Treasury and Reserve Bank reports went to Finance Minister Bill English – whose electorate includes Queenstown – after Western co-owner Jeff McNally, Smolenski’s brother-in-law, wrote to English on March 11 begging for a $5 million bailout.
Treasury scotched the bailout: “There was no compelling case to provide taxpayer support.”
The official documents predict a major financial shortfall may be looming with Western’s wash-up – $40m or more.
McNally told English that Western’s “exposure” on claims to the first quake was $12.5m. Claims on the second quake, according to Treasury, “will breach its reinsurance cover by a substantial amount”. That cover was $28.5m, McNally told English.
Unsecured creditors are also owed $4m.
The burning question is whether reinsurers – international firms to which Western laid off claims risk – will pay out.
Co-owner McNally expresses doubts about payouts in his letter to English.
“Reinsurers have indicated there will be no further payments until Western has paid its $1m excess [for the first quake but] Western does not have the cash…”
McNally’s equally glum about payouts on the second quake.
“All indications are the reinsurers will not make any payments to Western until it has paid its [second] $1m excess and that they will take a hard line given the amount of [claims] money involved.”
Treasury says reinsurance premiums for both quakes total $6m – which Western doesn’t have – and “there’s a risk the reinsurance contract may be cancelled”.
However, liquidators could possibly offset premiums by allowing reinsurers to pay $6m less in claims, Treasury says hopefully – then cautions “this set-off is at the discretion of the reinsurers”.
With claims substantially exceeding $6m, it’s hard to see why the foreign reinsurers would agree to the set-off.
If reinsurance is secured, the Reserve Bank predicts Western’s total shortfall on claims will drop to about $10m.
Western has 7000 policy holders yet its Standard & Poors rating was only a B – “weak”.
Liquidator Simon Thorn refused to comment on total claims or on whether reinsurance cover had been secured, saying a report will go to creditors “hopefully by the end of this week”.