IAG launches $750m capital raising as it braces for flood of claims

Insurance Australia Group chief executive Nick Hawkins has described the unexpected loss in the business interruption test court case as bad news for insurers, while launching a $750 million capital raising and bracing for a flood of claims.

The New South Wales Supreme Court of Appeal unanimously sided with policyholders on Wednesday in determining pandemic exclusions in business interruption (BI) policies were not valid.

BI policies are typically held by public-facing businesses, including restaurants, bars and gyms, that were forced to close due to nation-wide lockdowns. Now, these business owners may be able to claim for income lost during COVID-19.

Newly appointed IAG chief executive Nick Hawkins said the test case outcome was "bad news" for insurers. Credit: Dominic Lorrimer

"This is the third week I’ve been in the role of CEO, I feel like a lot has happened in that time," Mr Hawkins said. "Wednesday’s news was of course disappointing for us."

IAG said it had only received a small number of BI claims to date, but put aside $865 million for claims that could follow the court judgement. This allocation is much larger than those of IAG's competitors, with Suncorp putting aside $195 million and QBE predicting claims would not exceed its $500 million reinsurance cover.

Mr Hawkins told analysts during a briefing on Friday IAG was more exposed to its competitors due to its market share, and was taking a conservative approach to modelling.

IAG went into a trading halt on Thursday morning to assess the financial impact of the court ruling. The increased provision has punched a hole in IAG's capital position and the group has now launched a $750 million capital raising – which includes selling $650 million worth of shares to fund managers and $100 million to retail investors.

"It was not our expectation we would be having this meeting today," Mr Hawkins said.

The Insurance Council of Australia is considering launching another test case to determine whether other BI policy terms could be impacted by COVID-19, including whether a business' proximity to a COVID-19 outbreak might affect the ability to claim.

Mr Hawkins said IAG believed its pandemic exclusions were valid, but had made decisions based on the assumption the second test case would also be unsuccessful. "We may have taken a conservative view on that, but from the information we have at the moment, it feels like taking a conservative position would be prudent."

IAG has around 76,000 active BI policies and around half of these reference the Quarantine Act, which was replaced by the Biosecurities Act in 2015, according to IAG's chief financial officer Michelle McPherson. This mistake has been repeated across the industry and Citi Group believes many smaller unlisted insurers could now be unviable.

"This is not the outcome the industry expected," Ms McPherson said. "We just want to be very transparent."

In court, the ICA used HDI and Hollard Insurance policies to argue the inclusion of words "and subsequent amendments" in the pandemic exclusion clause meant new acts, rather than amendments to the Quarantine Act. Five Supreme Court judges rejected this view.

IAG has now re-written all new policies to reference the Biosecurities Act, but existing policies would have to expire before they could be amended. Mr Hawkins estimated all policies would be corrected by June next year.

"We’re no longer writing any business with reference to the Quarantine Act," he said.

Mr Hawkins said IAG would go through each claim "policy by policy", adding all legal avenues to reject claims would be considered.

"This was a test case for a customer that is not an IAG customer. We will need to consider our position, take a view on the merits of any additional action taken by IAG.

"We're only two days into this. It doesn't feel great, obviously, the way the announcement went."

Law firm Holding Redlich partner Howard Rapke said he had a dozen clients in the hospitality industry each with claims up to $300,000 that he was now confident would be paid.

"You take out insurance to provide for the rainy day situation, and guess what, that’s what this is," Mr Rapke said.