Insurance Australia Group (IAG) has announced a $750 million capital raising to bolster its balance sheet after the NSW Court of Appeal (NSWCA) unanimously ruled that rejecting business interruption insurance claims on the basis of COVID-19 losses is invalid. The company now expects to suffer close to one billion dollars in pandemic-related business interruption claim payouts.
IAG was represented in the test case by the Insurance Council of Australia (ICA), which argued that policies were meant to exclude pandemics.
UPDATE Monday 23 November 9:30am: IAG has now already completed the institutional part of the capital raising, securing $650 million from both domestic and overseas institutional investors. The article below has been updated.
The decision shocked the insurance industry and now exposes it to potentially thousands of claims from businesses that were forced to close due to COVID-19 restrictions.
IAG said it is now in discussions with the ICA to consider whether the insurers that were party to the court case will seek to appeal the judgment to the High Court of Australia, expecting that an outcome on such an appeal would be expected next year.
In a statement, the ICA said it is also in discussions with insurers, the Australian Financial Complaints Authority, and other stakeholders to consider a further test case that explores outstanding policy matters relating to the pandemic and business interruption insurance.
“The industry’s intention is that it would again meet the costs of both the policyholders and the insurers in any legal process, in the same fashion as the first test case regarding the Quarantine Act,” said the ICA. “The industry seeks to progress a court resolution of these matters quickly, and regardless of any decision around an appeal on the first test case.
“The Insurance Council will continue to work with all stakeholders and government to provide clarity for all parties and the industry. It will provide an update on these matters as soon as they are settled in coming weeks.”
The ruling is expected to have widespread industry impact as most insurers have similar policy wording. QBE Insurance said it expected that the net cost of any business interruption claim will likely be limited to $5 million per occurrence, adding that a number of policy triggers must be met before paying such a claim.
However, IAG was blunt in spelling out the total potential cost of new pandemic-related business interruption claims that may now arise.
“Based on a detailed assessment of its underwriting exposure at 31 October 2020, IAG estimates a post-tax provision of approximately $865 million is required to reflect the potential impact of the NSWCA judgment,” the company said in a statement. “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 capital raising is expected to go a long way towards IAG covering the new COVID-19-related business interruption claims it is now expected to receive. It has already completed raising capital from institutional investors, raising $650 million from the issuing of 128.7 million new fully paid ordinary shares at a price of $5.05 each, a discount of 7.5 per cent on Friday’s closing price of $5.46. The company said that it received significant interest in the capital raising from both domestic and offshore institutional investors.
“IAG is pleased with the strong support shown for the equity raising from its shareholders,” the company said in a statement issued Monday morning. “The success of the raise is an endorsement of the decisive action to maintain balance sheet strength. This positions the company well to execute on its strategic plan.”
IAG will raise the remaining $100 million from retail investors, offering them the opportunity to participate in a non-underwritten share purchase plan to do so.
Other insurers were reluctant to discuss the potential cost of the ruling, and before IAG’s announcement, experts believed that companies had put aside amounts of between $100 million and $200 million for pandemic-related business interruption claims.