Insurance Australia Group has been forced into a corner on the topic of potential COVID-19 losses from business interruption policies, and must now play its hand.
Despite calls from investors over many months to provide scenario modelling on potential outcomes, IAG held the line it was confident pandemics were excluded and any estimates of exposures would be too diverse to quantify.
Fast forward to this week, and the NSW Court of Appeals’ landmark findings on Wednesday in favour of two insured businesses in a test case brought by the Insurance Council of Australia.
The case — which is almost a certainty to be appealed by the insurance sector — sees the industry liable for hundreds of millions in business interruption payouts.
The case centred on policies which referred to the Quarantine Act (1908), which was repealed some years ago.
IAG is now in the thick of capital raising deliberations given it has about 25 per cent of the small business insurance market, and about 30 per cent of those policies may be exposed to the test case issue.
Goldman Sachs was making contact with fund managers on Thursday to gauge interest in a raising of about $500m and at what price. But other investment banks were not sitting on their hands and several were pitching to IAG and shareholders on Thursday to win a slice of the action alongside Goldman, or usurp them from the transaction.
This column understands several IAG investors were signalling early interest in participating in a capital raising at a discount in the high single digit percentage range from where the IAG stock last traded at $5.46. The shares were placed in a trading halt on Thursday.
On the business interruption matter, IAG’s exposure is somewhat offset to the tune of almost 33 per cent via quota share arrangements — which allow insurers to share premiums and losses at a fixed percentage — with reinsurers. It has quota share arrangements with Warren Buffett’s Berkshire Hathaway, Swiss Re, Munich Re and Hannover Re.
But as IAG works through its numbers on business interruption it also has to think through how it will approach other grey areas in interruption policies, that are not covered by the first test case in this jurisdiction.
Whether IAG includes the potential for further losses as part of its capital raising deliberations and how much it dips into excess capital are key considerations.
For investors that have been dealing with a stark underperformance in IAG’s stock since the first quarter pandemic ructions, some clarity around the issue even via a raising, will likely be welcomed.
Rivals Suncorp — which this week set aside provisions of $195m regarding the potential fallout from the local test case — and QBE, will be watching closely either way.
QBE is also due to soon learn the fate of an appeal in the UK over a test case the insurance industry lost there. Four days of hearings were due to wrap up on Thursday.
In the Australian case, QBE estimates the net cost of business interruptions claims due to COVID-19 will amount to just $5m “per occurrence” after it draws on quota share and dips into catastrophe and other reinsurance arrangements.
Immigration debate
As the economic recovery debate rolls on, diverging views are emerging over the role immigration can play.
It was interesting on Thursday at The Australian’s Strategic Forum that two chairmen of the major banks urged policymakers to take a measured view on immigration in a post COVID-19 world.
Stephen Kirchner, from the United States Studies Centre at the University of Sydney, believes Australia needs to set in train a post-World War II-style immigration policy of increasing population growth.
But National Australia Bank’s Phil Chronican and Commonwealth Bank’s Catherine Livingstone think the nation is better served thinking the immigration policy through carefully and ensuring post-COVID-19 levels can keep pace with infrastructure in our cities.
“Up until relatively recently our migration program was getting ahead of our infrastructure capability and certainly in the major cities,” Mr Chronican said.
He stressed any increase in immigration should happen progressively and focus on skills.
Livingstone said: “Immigration does not give you free growth because you have to invest in the infrastructure, and we are seeing the cost of that now and the catch up.”
Cartel plea
Bankers tied up in the competition regulator’s cartel action against ANZ, Citigroup and Deutsche Bank are nearing a crucial date, which sees them make a formal plea in the criminal case.
The not guilty or guilty pleas are due in court on December 8, and will form a turning point in the long-running action.
The matter relates to an ANZ capital raising and how the banks managed a shortfall of shares not taken up by investors.
The Australian Competition and Consumer Commission lobbed the explosive criminal case in 2018, as fellow bank on the capital raising JPMorgan was granted immunity for its co-operation.
The cartel action involves Citigroup’s former Australia boss Stephen Roberts, Citi bankers John McLean and Itay Tuchman and ANZ executive Rick Moscati.
Deutsche Bank’s former country head Michael Ormaechea and former equity capital markets boss Michael Richardson, are also part of the action.
The case is being closely watched by the investment banking community, even though lawyers have since put additional clauses in capital raising and underwriting agreements to ward against running into issues.
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