IAG chief criticises policy wording ‘in hindsight’ after $460m loss

Insurance Australia Group chief executive Nick Hawkins has admitted its bungled business interruption policies were not clearly written, after the insurer reported a $460 million loss for the December half.

The results were weighed down by the $865 million set aside for an expected flood of claims from business owners who lost income as a result of COVID-19 restrictions, after the insurance industry lost a landmark court case over pandemic exclusions.

IAG chief executive Nick Hawkins. Credit: Dominic Lorrimer

The test case sought to prove exclusions in business interruption policies were valid, despite referencing an outdated act of Parliament. Five judges of the NSW Supreme Court of Appeal unanimously sided with policyholders in rejecting the insurance industry’s case.

IAG quickly launched a $750 million capital raising and later reported it expected the total pre-tax hit to earnings to be $1.15 billion if further legal challenges are unsuccessful.

“Obviously there were some wordings there that with hindsight aren’t as clear as they could have been,” Mr Hawkins told The Age and Sydney Morning Herald, after reporting the group’s interim results.

“Of course, they should have been updated at the time. With hindsight, that would have been a good move.”

IAG said it had so far received 500 business interruption claims from a mix of small and larger businesses. Chief financial officer Michelle McPherson would not reveal the value of these claims but said none had yet been paid. “Court process will ultimately determine what claims we pay,” she said.

When asked if the legal process will be drawn out over a couple of years, Mr Hawkins said: “We hope not.”

The market reacted positively to IAG’s results after expectations the insurer may increase its provision for COVID-19 losses did not eventuate, causing the stock to bounce more than 5 per cent by midday trade to $5.34 per share. The company said shareholders would receive a 7 cents per share dividend following strong premium growth and improved insurance margins.

Mr Hawkins said the six months to December had seen “more favourable than anticipated” economic conditions.

“We’ve seen double-digit new car sales growth, a significant increase in building approvals and we’ve seen unemployment rates reducing,” he said. “All of these are key inputs into the operating environment.”

IAG premiums grew by 3.8 per cent in the half and its underlying insurance margin – the difference between claims paid out and premiums received – was 15.9 per cent, a 1 per cent improvement on the corresponding period last year.

Mr Hawkins said IAG had benefited from the more subdued weather patterns, causing its natural perils claims to come in at $39 million below the group’s allowance.

Ms McPherson said IAG was able to renew its reinsurance cover for only a “modest increase” in price, following last year’s horror bushfires and hailstorms that punished the company’s profits.

During his first reporting season as chief executive after taking the helm in November, Mr Hawkins unveiled his four-pillar strategy to make IAG a simpler, digital-led insurer. “Acquisitive growth for us has delivered over 20 brands across multiple product lines, multiple geographies and multiple channels,” he said.

“Behind that, we have numerous platforms and systems with variable degrees of digital capability that sits behind and across our organisation.

“We have to solve this complexity of how we run our company.”

Shares closed up almost 5 per cent to $5.31.

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