The New Zealand Government yesterday rescued AMI Insurance, the second largest general insurer in the country.Rumours about the financial strength of AMI, and in particular the adequacy of its reinsurance arrangements, have been circulating for more than a month. It is the second bail-out of a significant financial institution by the Government in less than a year. Both insolvent institutions (the other was South Canterbury Finance) are based in the South Island city of Christchurch.The February 2011 earthquake in Christchurch, which followed the weaker but still serious September 2010 quake, exposed the business model and financial structure of AMI, a local champion.The Government yesterday morning announced a support package worth up to NZ$500 million for quake-hit mutual AMI.However, a bailout could cost the taxpayer up to NZ$1 billion, depending on the extent and nature of claims that arise for AMI as a result of the Christchurch earthquakes, Finance Minister Bill English said.The support package would be called on only as a last resort if AMI's own reserves had been exhausted - "unless the Crown believes it is in the public interest to take control sooner", English said."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," he said.If the package is called on, English said the Government would invest up to NZ$500 million of equity in AMI, with the right to take ownership and assume control of the company, if this was necessary.AMI Insurance is New Zealand's second-largest residential insurer, with 485,000 policyholders and 1.2 million policies across the country. In Christchurch alone it has more than 85,000 policyholders, with 225,000 policies - or about 35 per cent of the residential insurance market in the city.English said AMI approached the Government on March 9, saying it was concerned its reserves and reinsurance might not be sufficient to cover the total value of claims resulting from the Canterbury earthquakeThe NZ Government gave the company's management a letter of support to take to a meeting with its ratings agency, AM Best, two weeks later.Late last month, AM Best reduced its rating on AMI to A-, from A+.The letter was a "very light-handed indication of support," English said, and did not outline its contents in the package released yesterday."But it was required at the time to prevent a sudden and dramatic downgrade of the company," English said."It might have been a different situation [if the letter had not been provided]," he said.Under the support package deal, the Government has the option to pay NZ$100 million of the NZ$500 million of the capital it has made available at any time to take full ownership and control of AMI, English said.And if AMI calls for any money, the Government could take ownership of the company then too if it chose."So that puts a strong incentive on the current board and management that if they want to continue the business as it is now, then they need to find another