IAG rushes $750m raising after virus test case loss

IAG has kicked off an emergency $750m capital raising after an adverse court ruling on a business interruption insurance test case.

IAG CEO Nick Hawkins. Picture: NCA Newswire

IAG has kicked off an emergency $750m capital raising after an adverse ruling by the Court of Appeal in NSW on a business interruption insurance test case, as chief executive Nick Hawkins warned of pricing initiatives to recover industry losses.

In a unanimous judgment, the Court of Appeal determined on Wednesday that pandemic exclusions referring to the Quarantine Act, rather than the Biosecurity Act, failed to exclude cover for losses associated with COVID-19.

While IAG is in discussions with the Insurance Council of Australia about seeking special leave to appeal to the High Court, the general insurer said it would recognise a post-tax provision of $865m.

To strengthen its balance sheet, the group said it would undertake a fully underwritten institutional placement of $650m at $5.05 per share, as well as a $100m, non-underwritten share purchase plan.

Mr Hawkins said IAG believed exclusions to its business interruption policies were valid, but the opposite was assumed for the purposes of the provision.

“So, we may have taken a conservative view on that, but with the information we have at the moment it feels like taking a conservative position would be prudent,” Mr Hawkins said on an analyst call.

The industry, he said, needed to reflect on the losses it would suffer from the adverse court ruling, and “part of that” would involve a pricing response, as had occurred with other adverse events.

He also revealed that about half of IAG’s 76,000 business interruption policies referred to pandemic exclusions under the Quarantine Act, but the number was falling steadily as the Biosecurity Act was substituted for the Quarantine Act when customers renewed their policies.

The run-off for the old policies would finish by June next year.

IAG’s businesses underwrite more than $12bn of annual premium, selling insurance under many leading brands such as NRMA Insurance, CGU, SGIO, SGIC and Swann Insurance.

The company also said on Friday it had identified other items which would result in a pre-tax charge of $70m-$90m in its December interim result.

They included an increase in the customer refunds provision, and a strengthening in reserves for prior periods.

IAG said it had only received a small number of business interruption claims, but it had estimated the potential claims impact for the December half-year.

“Significant judgment has been exercised to derive the provision estimate, which has been subject to independent peer review and includes a risk margin to derive a 90 per cent level of confidence for the group’s total outstanding claim liabilities,” the company said in an ASX announcement.

IAG said its exposure did not allow for any state or national lockdowns after October 31.

More broadly, the group said guidance about gross written premium growth and underlying margin trends, which was outlined at the October 23 annual meeting for the opening quarter of 2021, had continued into November.

The month of October included the impact of three separate east coast storm events.

After allowing for protection provided by the 2020 aggregate cover, perils costs were tracking “broadly in line” with the perils allowance.