IAG responds to business interruption test case judgment and announces capital raising of up to $750 million to strengthen balance sheet
IAG has announced it will raise up to $750 million in new equity capital in response to the Supreme Court of New South Wales Court of Appeal (NSWCA) 18 November judgment on the business interruption insurance test case.
In a unanimous decision, the NSWCA determined pandemic exclusions that refer to the Quarantine Act and subsequent amendments, rather than the Biosecurity Act, are not effective to exclude cover for losses associated with COVID-19.
IAG’s view is that the intent of its business interruption policies is to not provide cover for any losses related to pandemics such as COVID-19. As a result, IAG is in discussions with the Insurance Council of Australia to consider whether the insurers that were party to the action will seek special leave to appeal the NSWCA’s judgment to the High Court of Australia. If an appeal proceeds, an outcome is expected in calendar year 2021.
Given the NSWCA’s decision, IAG intends to recognise a post-tax provision of $865 million and is taking decisive action to strengthen its balance sheet via a fully underwritten institutional placement of $650 million and a non-underwritten share purchase plan to raise up to $100 million.
Provision for potential business interruption claims
IAG has received a small number of business interruption-related claims to date. However, in light of the NSWCA’s judgment, IAG has estimated the potential claims impact in its reserving position for the half year ending 31 December 2020.
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. 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% level of confidence for the Group’s total outstanding claim liabilities.