The New Zealand government has moved to support the country’s largest locally owned insurer AMI (not the Australian-owned AAMI) and stop it from collapsing under the weight of claims from the February 22 earthquake that could have left tens of thousand people with no money and no coverage.

NZ’s Finance Minister Bill English said this morning the government was ready to invest $NZ500 million ($372.5 million) in AMI Insurance to help it meet the inflow of claims from the second Christchurch quake.

And the government made it clear that it could also take control of the company if necessary.

The government’s move, announced early today was quick, with the offer of money and to stand behind the company if claims rose above $NZ500 million. Hopefully the move will end the growing chance that AMI would not be able to meet future claims.

Christchurch-based AMI Insurance is New Zealand’s second-largest residential insurer with 485,000 policy holders and 1.2 million policies across New Zealand. It approached the government on March 9 and told it there was concerned it might not be able to meet the level of claims coming in from the second quake.

In Christchurch alone it has more than 85,000 policy holders with 225,000 policies — or about 35% of the residential insurance market in the city. That’s been the big headache and the drain on its reserves.

It is a mutual, owned by the policy holders and not listed on an exchange, like Australian Insurance Group (the old NRMA Insurance) is.

It said this morning it will use its own reserves (estimated at $NZ350 million) before accessing the government funds which would be held in a separate account.

The second 6.3 magnitude quake hit Christchurch on February 22, killing 180 people, damaging thousands of buildings and homes (at least 10,000 homes face demolition) and causing an estimated $NZ15 billion worth of damage.

Much of the insured damage bill of around $NZ10 billion, is effectively held by the country’s earthquake commission, which insures houses and land, but private insurers such as AMI also offer cover.

“Because of uncertainty around the cost of earthquake damage, it is too early to tell whether AMI will have sufficient resources to cover all of these claims,” English said in his statement.

He said the full extent of AMI’s liabilities from the earthquakes would not be known for several months but it could face a shortfall of up to $NZ1 billion.

AMI is the largest New Zealand-owned fire and general insurer with a network of 73 branches, two contact centres and 22 agencies. It has 830 staff and earned a profit of $NZ31 million in 2010.

The company confirmed the rescue in a statement of its own.

“AMI is pleased to confirm the arrangement with Government announced today by the Minister of Finance. It is designed to give our customers full confidence in the company following uncertainty about how much AMI will have to pay out in claims following the destructive February 22 quake AMI Insurance chief executive John Balmforth said.

“The final amount of AMI’s exposure from the quake remains uncertain. Although the flow of claims has slowed significantly in recent days, the final tally and cost is not known.

English said the “support package would be called on only as a last resort if AMI’s own reserves have been exhausted — unless the Crown believes it is in the public interest to take control sooner. 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.”

The move also opens the way for AMI to be acquired by another, bigger insurer (perhaps from Australia?).