Insurance Australia Group Ltd (ASX: IAG) has just agreed to an expensive class action settlement, which is why the IAG share price is down.
IAG’s class action
IAG has agreed to a settlement of the class action that was being carried out by Johnson Winter & Slattery against Swann Insurance and Insurance Australia.
The proceedings related to add-on insurance products sold through motor vehicle and motorcycle dealers. Investors first learned of this about a year and a half ago.
IAG exited the above business areas with the sale of Swann’s rights to distribute through motor vehicle dealers in August 2016 and the cessation of distribution through motorcycle dealers in the financial year ended 30 June 2016.
Settlement of the class action
The settlement involves a gross payment of $138 million and is subject to approval by the Federal Court of Australia.
After including all related costs and insurance recoveries, IAG expects a net impact after tax of the settlement of less than $50 million. This will be included in the FY21 half-year result to 31 December 2020.
Summary
That’s a material hit to profit and could have been avoided. I’m not a fan of investing in insurance businesses. They seem to get hurt every time there’s an expense storm on the east coast and they also seem to be heavily impacted every time there’s a recession. I prefer ASX growth shares that can deliver consistent growth like Pushpay Holdings Ltd (ASX: PPH).
