How deep is IAG in Greensill exposure?

Massive losses likely in the Greensill collapse could trigger some of the world’s biggest court cases. Photographer: Markus Hibbeler/Bloomberg

The massive losses likely in the Greensill collapse looks set to trigger some of the world’s biggest court cases as major institutions in different countries seek to escape multibillion dollar losses.

In Australia our largest insurance company, Insurance Australia Group is almost certain to be involved in some of the court actions along with Japanese insurer Tokio Marine, Credit Suisse and the German government.

I have been greatly assisted in my understanding of the issues by the wonderful research conducted by John Hempton, founder of Bronte Capital.

I emphasise that I do not know the likely outcome of the multiple court battles while on the local front, Insurance Australia is adamant that they will not lose.

However, it is sad that this great Australian company has once again got itself into a potential mess by straying from its base business. I will discuss that below.

The danger warning for IAG shareholders came last June in a disclosure letter from Credit Suisse to the unit holders in one of its supply chain funds suggesting that IAG had underwritten around $4.4bn in outstandings. A large part of those outstandings involved Greensill.

The exact IAG involvement with Greensill is not known but it appears to be greater than $4.4bn. When John Hempton published his material, IAG came back very strongly stating that it has no “net exposure” to trade credit policies including those sold through BCC to Greensill entities.

Directors say IAG sold its 50 per cent 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” but clearly they may be required to make payments and then exercise their rights to claim them back.

I am not challenging the IAG statement but make two points. First, from my experience, ownership change contracts that pass vast losses from one company to another, albeit unknowingly, need to be worded extremely well to avoid court challenge. IAG should never have allowed itself to be so exposed.

Second, the problem with the IAG statement is that Tokio Marine say they are not liable. Indeed Tokio Marine says it is “ready to protect its interests in court as required”. Ugh!

The matter is made more complex by the fact that it would seem that the Japanese and IAG have been trying to rundown exposure to Greensill.

This was highlighted on March 1 by a late night emergency sitting of the Supreme Court of NSW brought by Greensill for an interlocutory mandatory injunction compelling IAG to issue a trade credit insurance policy.

The policy terms required 180 days terminating notice but Greensill claimed that only 179 or 178 days of notice was given so that Insurance Australia Group should be forced to renew $US4.6bn in credit insurance.

A single judge in a late night hearing wasn’t prepared to bring a major Australian insurer to its knees by forcing renewal but that case will very likely be resumed and IAG shareholders will have a vital interest.

Clearly Tokio Marine will oppose any attempt by IAG to pass any liability to the Japanese.

It is also clearly possible that neither Tokio Marine nor IAG have any liability.in which case a German bank which Greensill had been allowed to take over may have liability. I

If that is the case and the bank is not solvent then liability may rest with the German government. It is likely the German government will fight very hard to shift any liability one or two of the insurers or any other group with money.

And finally to the extent that clients of Credit Suisse have been hit they will rely on clear statements by Credit Suisse than the loans in the fund were protected by insurance. In the June statement both IAG and Tokio Marine were named. Credit Suisse may join actions against the insurers or it may let unit holders suffer or take all or part of the loss. Clearly there is lot of scope for court actions from Credit Suisse.

I don’t believe anybody knows exactly what will happen - I certainly don’t - but global lawyers can see the potential for hundreds of millions in fees.

Sadly, IAG has a history of exotic global games that create losses. I remember about 15 years ago it went on overseas adventures and lost big sums.

Its shares slumped and there were attempts to take over IAG to gain control of the great cash flow business of IAG, its car and house insurance in NSW in Victoria and other areas, which is 30 per cent owned by RACV. However RACV has buy out rights should control of IAG change.

Around 2008, QBE looked at buying IAG but withdrew when it discovered the RACV deal.

Instead of going on high risk adventures RACV used the insurance cash generated to build up a network of resorts and other member facilities.