Friday, March 12, 2021

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.”

We are about a week into the speculation here, and as far as I can tell we still do not know who is holding the bag.

But my working hypothesis is that IAG will face large lawsuits with uncertain outcomes and where disasters are possible. The defining disaster being they are held liable on primary policies but the reinsurance policies somehow fail. The scale of legal risks however are large enough to threaten IAGs solvency.

But at the end of the day IAG will probably skate through, and meanwhile Credit Suisse will have to operate where they do not know whether the funds are insured or not - and will wind up having to take large provisions anyhow. 

So far the stock market thinks that this isn't quite as bad as it appears to me. But that is the difference between a bull market and a bear market. In a bull market nobody is carrying the risk and nobody gets marked down. In a bear market everyone is carrying the risk and everyone is marked down.



Anonymous said...

I think the nastiest scumbags in all this saga are Credit Suisse. Stuffing their PWM clients while knowing exactly what was going on. I queried their portfolio manager a few times on their exposures as this was the favourite hunting ground for short sellers. My impression was that they were well informed of the ultimate state of affairs.
I do hope they have to take large losses as the organization allowed these scoundrels to operate with impunity.

Anonymous said...

Hi John, what do you say to critics of your bear case arguing that obligors to a good degree are runnning legitimate businesses and hence have other financing options available post Greensill/CS? In their view, losses may be much lower than what is currently discussed in the media. Thanks.

James B. Shearer said...

"... hence have other financing options .."

According to Matt Levine:

"But the money did not all go to financing receivables. Much of it went to financing “prospective receivables” from “prospective buyers.” That is, there would be some steel company that did not buy coal from Bluestone, and Bluestone and Greensill would agree that probably it should and some day it would, and they would figure that, well, if it did buy coal from Bluestone, it would probably buy like $15 million worth, and so Greensill would lend Bluestone that $15 million. And then Greensill would eventually collect the $15 million from the steel producer, if and when it did buy coal from Bluestone. This sounds a little like I’m kidding but I’m absolutely not:"

In this case is sounds like alternative financing might be a little tricky. I have no idea how typical it is.

Anonymous said...

Tokio Marine stated on 23 March that:

In light of recent developments for Greensill’s business, we would like to clarify that trade credit insurance does not cover the liability of the policyholder nor the insured; rather it covers the accounts receivable of the insured. Hence if Greensill were the insured, trade credit insurance would cover what Greensill is owed, rather than what Greensill owes others. As such, in that case, the insolvency of Greensill does not crystallise any exposure for TMNF. The figures that have been reported in the media with respect to underwriting (such as “in excess of AUD 10 billion”) refers to the accumulated amount of the accounts receivable of Greensill, not exposure for TMNF.

Are you yourself getting a little confused between what Greensill is owed as opposed to what it owes others? Just asking.

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