IAG urged to come clean on Covid risks

Insurance Australia Group investors are putting the board on notice to swiftly address the topic of potential exposure to business interruption policies.

Insurance Australia Group chair Elizabeth Bryan. Picture: Adam Yip for The Australian

Insurance Australia Group investors are putting the board on notice to swiftly address the topic of potential exposure to business interruption policies during COVID-19, given the heightened uncertainty has weighed on the company’s value.

Several insurance analysts have estimated IAG’s stock is pricing in heavy $1bn to $2bn losses from business interruption claims, yet investors are frustrated the company has not publicly addressed the risk or provided modelling on possible outcomes.

IAG — which counts brands including NRMA, CGU and Swann Insurance in its stable — is among large local insurers navigating the pandemic and tough questions around the validity of related policies.

Ethical Partners Funds Management, which holds $100m in IAG shares, has hit out on the issue. The firm has been asking management about it since April, and raised the matter with the insurer’s board last month ahead of its annual general meeting.

“It is certainly holding the stock back so the board is actually standing in the way of realising value for shareholders,” said Ethical Partners’ investment director Nathan Parkin.

“We think that by explaining their position more fulsomely that will unlock the value and it won’t be vulnerable (to a take over).

“The board needs to take this issue off the table … they need to say something sooner rather than later.”

Ethical Partners’ letter to the board — sighted by The Australian — also raised concerns around IAG’s continuous disclosure obligations given large estimates in the market around business interruption claims.

“We believe IAG should better inform the market on this important issue, with appropriate BI (business interruption) disclosures, rather than allowing the information vacuum to be filled with broker and analyst speculation,” the letter said.

“Given the potential materiality (or immateriality as the case may be) of IAG’s BI claims, it could even be argued that the company now has an ASX Listing Rule 3.1 disclosure obligation in view of the analysis.”

Wilson Asset Management portfolio manager Matthew Haupt, also an IAG investor, called on the company to rethink the “say nothing” approach on the issue.

“Their stance has been ultra conservative (on capital) and the details (on business interruption) haven’t been forthcoming,” Mr Haupt said.

“I think the share price is factoring in way too much. I would like more clarity on it but I can sympathise with the sensitivity.”

A landmark test case on business interruption policies was filed in the NSW Supreme Court by the Australian Financial Complaints Authority and the Insurance Council of Australia in July.

It is seeking to clarify disagreements around wording and the application of infectious diseases cover in business interruption policies.

A judgment is expected before the year’s end.

A second domestic test case on business interruption insurance covering the “prevention of access” under policies, is understood not to be proceeding.

IAG chair Elizabeth Bryan told investors last month that the insurance sector was not “designed, structured, or capitalised” to cover risks such as a pandemic.

Ms Bryan said it was up to the federal government to step in as a “shock absorber” during COVID-19 and the company would be in a position to comment further after a ruling on the initial test case. 

An IAG spokeswoman on Tuesday said: “We believe the intent to exclude pandemics is clear in our policies, however, until we see the outcome of the NSW Court of Appeal judgment, it serves little purpose to attempt to put a precise number on any potential liability.

“Once we receive a judgment outcome, we will update the market,” she added.

But Mr Parkin said uncertainly over the issue had seen IAG shares underperform the local sharemarket by about 47 per cent since the end of March. 

Another IAG shareholder, who declined to be named, said the business interruption issue was “clearly material” for the company and it was a just a matter of time before it would have to address it.

“More disclosure is always better than less,” he said.

Macquarie Group analysts reckon the market is pricing in a $1.9bn business interruption loss at IAG, after reinsurance, which they say is “highly unlikely” and reflects total losses for the local market of $7.9bn.

“We estimate IAG’s likely business interruption losses at circa $125m post-reinsurance,” they said.

Morgan Stanley analysts have said the market is pricing in IAG’s business interruption losses in the range of $1bn-$2bn.

“We note few claims have been lodged for now with brokers and IAG. As a crosscheck, if we apply QBE’s UK experience, IAG could have $300m to $1.2bn of gross claims,” they said.

The issue has been in the headlines globally.

QBE outlined a potential business interruption exposure in May prior to insurers being hit with a UK court judgment that ruled policies with reference to infectious or notifiable diseases be paid. QBE has since said it expects those costs net of reinsurance will be $US70m ($98m), but the matter is open to appeal.

The business interruption issue has also spurred the Australian corporate regulator to remind insurers to be mindful of wording they use when claims are lodged.

New IAG chief executive Nick Hawkins took the reins this week and moved quickly to put his stamp on the insurer.