By Alice Uribe

SYDNEY--Insurance Australia Group Ltd. will launch a 750 million Australian dollar ($545.3 million) capital raising after local insurers lost a business interruption test case.

The New South Wales Court of Appeal, in a decision on Wednesday, unanimously found in favor of policyholders when it determined that pandemic exclusions referencing the repealed Quarantine Act 1908, rather than the Biosecurity Act 2015, cannot exclude cover for Covid-19 losses.

On Friday, IAG said it would take a A$865 million post-tax provision after assessing the potential impact of the court ruling. The provision includes a risk margin to derive a 90% level of confidence for the group's total outstanding claim liabilities, said IAG.

IAG estimated the provision will have a net post-tax impact on IAG's fiscal 2021 earnings of approximately A$805 million and would lower its regulatory capital by more than A$950 million.

It would also reduce IAG's Common Equity Tier 1 ratio to the lower end of the insurer's target range, it said.

"Irrespective of whether there is an appeal against the NSWCA judgment, IAG believes it is prudent to maintain its capital position above the upper end of its CET1 target range," it said.

In a year-to-date trading update, IAG said October included the impact of three separate east coast storm events. After allowing for protection provided by the calendar 2020 aggregate cover, the insurer said its perils costs are tracking broadly in line with the related perils allowance.

IAG may also take a pretax charge of between A$70 million and A$90 million, partly to reflect an anticipated increase to the customer refunds provision established in fiscal 2020 to cover multi-year pricing issues.

IAG said it is in discussions with the Insurance Council of Australia, which jointly filed the test case with the Australian Financial Complaints Authority, to consider special leave to appeal against the decision in Australia's High Court.

"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," said the insurer.

The ICA on Thursday said along with insurers, AFCA and other stakeholders it is considering a further test case exploring outstanding policy matters, including proximity and prevention of access, relating to the pandemic and business interruption insurance.

IAG said while prevention of access was not subject to the test case heard by the NSWCA, it believed that overarching pandemic exclusions should also apply to policies with prevention of access clauses. Still, A$150 million of IAG's estimated post-tax provision has been set aside to cover policies with prevention of access extensions.

The capital raising comprises a A$650 million underwritten institutional placement be conducted at a fixed price of A$5.05 per new share and a non-underwritten share purchase plan to raise up to A$100 million.

IAG had placed its shares under a trading halt on Thursday, ahead of the raising.

Write to Alice Uribe at alice.uribe@wsj.com

(END) Dow Jones Newswires

11-19-20 1918ET