Insurers prepare for wave of First Brands claims

Insurers are preparing for a wave of potential claims relating to First Brands Group’s bankruptcy, as one of Wall Street's biggest debacles in years ripples through the financial system.

Allianz, Coface and AIG are among the groups to have written policies shielding trading partners or investors from losses through their trade credit businesses, according to people familiar with the matter, leaving them exposed to the auto parts maker’s supply chain.

Senior executives at some large credit insurers told the Financial Times that they had dialled back coverage linked to First Brands ahead of its $12bn bankruptcy.

One trade credit finance fund manager said that his insurer began to reduce its cover almost a year ahead of First Brands’ collapse, after spotting payment problems building up at one of the group’s subsidiaries.

“The insurers always know first,” the fund manager said.

Allianz, Coface and AIG declined to comment.

Insuring invoices underpinning global trade has become one of the most lucrative niches in the insurance market. While suppliers that sell raw materials or widgets to large corporations have long used insurance to shield them from risk of not getting paid, credit insurance has developed into a hedge for financial institutions lending against invoices.

First Brands relied heavily on invoice financing, selling customer invoices for cash and using third-party investors to finance its own debts to its suppliers.

Some of the biggest providers of off-balance sheet invoice finance to First Brands made heavy use of the product, including Point Bonita Capital, a fund managed by US bank Jefferies that has disclosed $715mn of exposure linked to the Ohio-based group.

Point Bonita previously told investors that, as of June, 20 per cent of its overall $3bn portfolio of invoice- and inventory-linked debt was “hedged” through credit insurance and similar products.

Evolution Credit Partners, another big creditor to First Brands, also made use of credit insurance according to people familiar with the group’s practices. In 2021 it hired Kerstin Braun, a veteran of insurer Coface, as a managing director at the firm.

Some insurers told the FT that they did not have “material” exposure to First Brands’ off-balance sheet financing arrangements.

However, claims can snowball into messy legal disputes that take years to resolve. Japan’s Tokio Marine and Australia’s IAG have spent nearly five years battling a multibillion-dollar potential payout on insurance linked to Greensill Capital, the supply-chain finance specialist whose 2021 implosion sparked a financial scandal.

In the case of First Brands, the FT reported on Thursday that the US Department of Justice had opened an inquiry into the company’s collapse. However, the probe is at an early stage and does not necessarily mean any wrongdoing has occurred.

Whether the First Brands debacle mutates into another Greensill moment for the insurance industry may depend on the steps insurers took to mitigate their exposure ahead of the $12bn bankruptcy, as well as their willingness to engage in grinding legal disputes over the precise wording of their policies. 

The wording of policies varies and in some cases there is a high bar for avoiding payouts. Where fraud is involved — and First Brands has not been accused of fraud — many policies can be invalidated only if the insurer can prove the policyholder was aware of the fraudulent actions and either did not disclose them or misrepresented them. 

One insurance market professional involved in numerous disputes said that some policies still pay out if a rogue employee has erred, naming the individual executives who must have made the misrepresentation for the policy not to pay out.

Insurers made large payouts following the collapse of fraudulent dairy conglomerate Parmalat in 2003, as they were unable to prove that banks had any knowledge of the fraud, the person added.

However, payouts have in recent years tended to be far lower than for other types of insurance. Trade credit insurers such as Coface and Atradius have paid out about 40 cents for each dollar of premium taken in, earnings reports show — less than half the typical 90 cents expense in other lines of business such as property and casualty.

Bos Smith, a portfolio manager at BroadRiver Asset Management, said that he had been using credit insurance for about a decade and had yet to claim. The First Brands situation presented “an important case study” for the insurance product, he said.

“Given the high-profile nature of this bankruptcy, if credit insurance claims are paid without incident, the market will likely gain significant confidence in the product,” Smith said. “If they are not, many of us will be confronted with a concerning data point.”