CS: Full Insurance Coverage for Greensill-Funds?

Credit Suisse has always emphasized insurance coverage to investors in the Greensill funds. But there are many question marks surrounding this. Credit Suisse could be stuck with the losses.

In connection with the closure of the Greensill funds of Credit Suisse (CS), one question remains unanswered: Who is responsible for the losses? Since Greensill Capital is in insolvency, the options are limited. The insurers of the credit risks, the investors themselves, the taxpayers in Germany – or CS – come into question.

In its documentation on the Greensill funds, the major Swiss bank has always pointed out that the credit risks are covered by insurers with high ratings.

81.5 Percent – Fully Insured?

But there are doubts about this. First, the number of insurers is fairly limited. In the summer of 2020, according to a CS product sheet, there were still Insurance Australia, Tokio Marine, Euler Hermes, and, with shares of less than 1 percent, Switzerland's Zurich and HCC International Insurance. In the June 2020 factsheet, CS states an insurance coverage of 81.5 percent, but continues to write that the portfolio is «fully insured».

In fact, the focus is currently on the funds' insurance coverage, meaning the coverage purchased from Greensill Capital. After Greensill announced insolvency on Monday, Insurance Australia (IAG) shares plunged.

The company subsequently issued a statement saying it had no direct touchpoints related to insurance policies sold to Greensill. It said IAG had largely covered the «exposure» through reinsurance and had also sold its BBC subsidiary, along with the Greensill policies, to Tokio Marine in April 2019.

Judge Denied Greensill's Request

Notabene, it had been insurer Tokio Marine that brought down Greensill. Last July, Tokio Marine had provided insurance coverage to fund firm Greensill Capital after an underwriter at BCC massively exceeded risk limits. As a result, CS was unable to invest in any of the credit securities issued by Greensill – leading to the closure of the funds and Greensill Bank in Germany.

Earlier this week, Greensill Capital had unsuccessfully tried to use a court order to force IAG to insure a $4.6 billion loan portfolio after all.

There will be a tough legal battle over that insurance coverage. Lawyers will meticulously tease apart which insurer wrote which policy for Greensill Capital and when, and what specific terms applied. The aim of this legal battle is not least to pass on or shift financial responsibility.

Will It Fall on CS?

John Kempton of Bronte Capital, a well-known hedge fund, wrote in a recently published blog post that it will most likely be CS that will have to pay.

In the customer documentation, there had been talk of insurance coverage until the very end. Now it turns out that both the fund and the insurance exposure were concentrated on one company in particular, namely Greensill Capital.

Since there was nothing more to be gained there, the insurers IAG or Tokio Marine, Greensill Bank, or the German deposit insurance company – or the big Swiss bank – remained. The CS funds last reported a volume of $10 billion in client money. CS has already begun repaying excess cash in the funds.