Greensill - who is holding the bag - part two

 Insurance Australia Group reacted to my last  post by stating that they carried no net risk. It was all reinsured to Tokio Marine (the big Japanese insurer).

Here is their statement in full:

In response to market enquiries relating to Greensill exposure, IAG clarifies it has no net insurance exposure to trade credit policies including those sold through BCC to Greensill entities.  

IAG sold its 50% interest in BCC on 9 April 2019 to Tokio Marine Management (Australasia) Pty Ltd with the result of eliminating net exposure to trade credit insurance.

BCC is an underwriting agency that was authorised to underwrite trade credit insurance on IAG’s behalf through Insurance Australia Limited (IAL), one of IAG’s two licensed insurance subsidiaries in Australia. 

As part of a transition arrangement after the April sale of BCC, new policies were underwritten by IAL from the date of sale up to 30 June 2019 and Tokio Marine & Nichido Fire Insurance Co. Ltd  (Tokio Marine) retained the risk for these polices, net of reinsurance.

In addition to extensive reinsurance placed by IAG, as part of the sale IAG entered into agreements with Tokio Marine for it to hold any remaining exposure to trade credit insurance written by BCC through IAL.

IAG thus say they have no “net exposure”.

The summary of this press release is that Insurance Australia Group were once taking risks (on Greensill) that could kill them but they do not take them any more and any risk they have they have passed off to Tokio.

Teenagers (especially teenage boys) take risks that could kill them. Then usually they stop and they are okay. Sounds familiar. 

The IAG as stupid teenage boy now grown up meme is one that I could get behind. 

And I can’t reasonably complain about it either. I was once a teenage boy and am familiar with the process of growing up.

The only problem with this statement is that Tokio Marine say they are not liable. There is an article in the Financial Times where Tokio do not think that these policies will impact them in any meaningful way.

The money quote though is this:

People with direct knowledge of Tokio Marine’s situation said the Greensill issue was dominating the attention of top management. They added that there was a working assumption that many of the questions being asked would ultimately be answered by expected litigation proceedings in Japan, Australia and possibly Germany.

Tokio Marine said it remained “ready to protect its interests in court as required”.

The highlighted section could be very nasty for Insurance Australia Group.

You could see a situation where the primary insurance is determined to be valid and Insurance Australia Group get a ten figure judgement against them. (After all the amount insured is many billions of dollars and the more we find out about Greensill the uglier it looks.)

Insurance Australia has to front the money, and they have a claim against Tokio. It may even be a valid claim, but Tokio may protect their “interests in court as required”. That could be very ugly for Insurance Australia as they would be ten figures out of pocket until they win their claim against Tokio.

I am not sure how that would affect their regulatory capital situation. 

Whatever – methinks it is likely that IAG will (eventually) get out of much (probably all) of their BCC liability. I see little reason to doubt their statement that they have no net exposure – although they clearly have large, thinly disclosed gross exposure and some legal risk.

Credit Suisse

Credit Suisse according to the FT is still working on the assumption that the funds are insured. To quote:

A person briefed on Credit Suisse’s stance said the bank was “working under the hypothesis” that the insurance policies would pay out in the event of a default, as they had done in the case of NMC Health, the former FTSE company that collapsed last year. But they added: “This is one of the big questions outstanding.”