The Insurance Australia Group Ltd (ASX: IAG) share price has been the worst performer on the S&P/ASX 200 Index (ASX: XJO) on Monday.
In early afternoon trade the insurance giant’s shares are down 5.5% to $5.15.
Why is the IAG share price sinking lower?
Investors have been selling the company’s shares this morning after they returned from a trading halt following the completion of an institutional placement.
Insurance Australia Group raised a total of $650 million through the issue of approximately 128.7 million new shares to institutional investors at a 7.5% discount of $5.05 per new share.
According to the release, the company received significant interest from both domestic and offshore institutional investors.
Management revealed that it was pleased with the strong support shown for the equity raising from its shareholders. It feels the success of the raise is an endorsement of its decisive action to maintain balance sheet strength. This, it feels, positions the company well to execute on its strategic plan.
The insurer will now push ahead with its non-underwritten share purchase plan (SPP), which is aiming to raise up to $100 million.
These funds will be raised at the lower of the placement price or a 2% discount to the five-day volume weighted average price of its shares up to and including the closing date of the SPP.
Why is Insurance Australia Group raising funds?
As mentioned above, the company launched the capital raising in order to strengthen its balance sheet.
This was necessary after courts ruled that insurance companies would have to pay out business interruption claims relating to the COVID-19 pandemic.
For Insurance Australia Group, this means an $865 million business interruption claims provision.
Based on its accounts at the end of October, this provision would reduce the company’s CET1 ratio to approximately 0.84 times the Prescribed Capital Amount (PCA). This would place it approximately $140 million below the lower end of its targeted benchmark range.
And while the company could still appeal the court ruling, management believes that maintaining its capital position above the upper end of its CET1 target range was the prudent thing to do.
The SPP is due to close on 18 December.
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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