IAG’s risk of Greensill capital charge

An insurance loss of more than $US2 billion related to the collapse of Greensill is yet to be recognised by the global insurance markets, analysts say.

A more than $US2.1 billion insurance loss related to the Greensill collapse is yet to be recognised by the global insurance markets. Picture: AAP

An insurance loss of more than $US2 billion ($2.6 billion) related to the collapse of failed supply chain financier Greensill is yet to be recognised by the global insurance markets, with the answer likely to be lying in IAG’s reinsurance programs, according to investment bank Macquarie.

Shortly after the implosion of Lex Greensill’s empire, IAG sought to calm investors by declaring it had no net insurance exposure to trade credit policies – including those sold through broker BCC – to the supply chain ­financier.

But there is a large insurance loss, in the billions of dollars, that will need to sit somewhere, according to Macquarie.

“We believe a gross claim of around $US2.3 billion is likely to eventuate for the global insurance market,” Macquarie analysts said in a note to clients.

“As far as we are aware, the only insurer to record a provision is Tokio Marine (around $US205 million, all incurred but not reported).”

IAG sold its 50 per cent interest in Sydney-based insurance broker BCC in April 2019 to Japan’s Tokio Marine, which it has said eliminated its net exposure to trade credit insurance.

“Our analysis leads us to conclude IAG’s ‘no net insurance exposure’ is most likely explained by their reinsurance policy wordings, which must have been struck on a ‘follow the fortunes’ basis and without ‘utmost good faith’ clauses, thus looking through issues in the underwriting agency (BCC),” Macquarie said.

“While we are concerned a reinsurer would change the standard wording of a contract given concerns around fraud within the underlying risks, our discussions suggest IAG’s confidence is high, their position has been re-examined, and they remain without net exposure. Should this position change, the attribution of the loss could differ.”

Macquarie’s research also raises questions on the 2019 sale of BCC and whether “it was contingent upon Tokio Marine getting to the bottom of the Greensill policies”.

“While our discussions with IAG suggest management is highly confident this was not the case, the attribution of the loss could differ if that position was to change,” Macquarie said.

The analysts also cautioned on the prospect of a “capital squeeze” if IAG’s reinsurers were slow to pay on any exposure.

“Given these claims progress quickly post the bankruptcy of a customer, if IAG’s reinsurers take a while to pay, this could result in IAG carrying additional capital charges and therefore have a capital squeeze,” they cautioned.

IAG shares closed down 1.2 per cent on Tuesday, at $4.96.