Shares in Insurance Australia Group Ltd (ASX: IAG) are rangebound on Wednesday. IAG shares now trade less than 1% in the red at $4.58.
Earlier in the day, shares were trading at a high of $4.68. That's before the market digested a market-sensitive update regarding the second business interruption test case, handed down in February.
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Why are IAG shares tracing lower today?
IAG advised that the 28-day deadline for parties to lodge an application to seek leave to appeal on the case has now passed.
Policyholders have lodged applications for special leave to appeal aspects of the judgement, handed down by the Full Court in the High Court of Australia, per the release.
The release also says that IAG has filed an application for special leave to appeal the Court's finding on JobKeeper payments.
"At this stage, there will be no adjustment to IAG's $1,222 million net provision for potential business interruption claims," it said.
The company also said that as it gains more clarity on its legal position it will "refine the prediction of ultimate claim costs." It will then make appropriate provision adjustments, if and where warranted.
"Current indications are that a release from the provision will occur and is likely to be recognised over time," it added, noting that there are still processes and costs to be realised.
Analysts covering the financial industry at Bloomberg Intelligence were quick to react to the update, noting that any changes to provisions might hurt IAG dividends and or buybacks.
"IAG's 2023 distribution might drop to A$300 million this year from a possible A$1 billion including buybacks if the High Court reverses a Federal Court finding in the business interruption test case that favoured insurers," Matt Ingram and Jack Baxter from Bloomberg Intelligence wrote today.
"Even if the court finds against insurers, that shouldn't impact profit at IAG, which has a $A1.2 billion provision," the pair added.
"IAG has said it may return a 2020 A$776 million capital raise if the finding in favour of insurers holds."
IAG share price snapshot
The IAG share price has crumbled more than 4% into the red over the past 12 months, but is charging up 7.5% higher this year to date.
During the previous month, IAG shares fell more than 5% but have held gains over the past week of trading.
