Credit Suisse’s internal review into Greensill Capital’s collapse is pointing the finger at Marsh & McLennan, the world’s largest insurance broker, according to people familiar with the matter.
Financial institutions from Sydney and Tokyo to Zurich and London are preparing for a lengthy legal battle over who will absorb losses linked to Greensill, the supply chain finance group that filed for administration this month.
Greensill lent money to corporate customers including Sanjeev Gupta’s GFG Alliance and securitised the debt into notes that were put into funds at Credit Suisse and sold to investors.
The mechanism froze on March 1 when a chunk of the insurance covering the credit expired and Credit Suisse suspended the funds. The Swiss bank is now winding them up and has warned it expects serious reputational damage, lawsuits from investors and potentially a material financial hit. It has repaid $3.1bn of the $10bn funds to investors but says there is “considerable uncertainty” over the rest.
As Credit Suisse continues its review, executives have highlighted the role of Marsh, said people familiar with the matter, noting the broker was responsible for making sure that every security in Greensill funds had adequate insurance coverage.
Marsh was Greensill’s commercial insurance broker, responsible for finding cover for the finance group against non-payment by its borrowers.
Insurers including Tokio Marine of Japan and Insurance Australia Group were involved in providing cover. Tokio Marine has said the insurance may not have been valid and is “ready to protect its interests in court as required”. IAG has said it has no “net insurance exposure”.
When Credit Suisse extended a $140m bridging loan to Greensill last October in expectation of the business listing, the bank contacted Marsh as part of its due diligence on the loan, according to two people with knowledge of the discussions.
On two separate phone calls between Credit Suisse executives and managing directors from Marsh in October and December, the bank’s representatives asked a series of questions about the insurance policies underwriting the funds’ assets. These covered the durability and duration of the insurance, the pricing of coverage and default rates.
Also present on one of the calls was a potential investor in Greensill’s debt.
During the calls, the Marsh managing directors gave no indication of the problems regarding the renewal of the insurance policies, said people familiar with the calls.
“They identified no red flags even when questioned,” said one person. “The only comment they gave was that the cost of insurance would increase due to Covid.”
However, by this point there were already some problems with the insurance coverage.
The broker was forced to scramble in September after Sydney-based underwriter Bond & Credit Co — acquired in 2019 by Tokio Marine — formally served notice on a policy backing more than $4bn of working capital lending.
BCC had informed Marsh and Greensill in August that it had fired an underwriter after finding he had exceeded his risk limits with coverage to Greensill, and that the firm was investigating its employee’s “dealings” with the lender.
In the following months, as Greensill failed to renegotiate coverage with BCC’s owner Tokio Marine, it also engaged Marsh “to seek to obtain quotations for alternative trade credit insurance policies” to replace the lapsing cover, Greensill’s lawyers told an Australian court hearing in March. The efforts were unsuccessful, the court heard.
Witness testimony since provided to the English High Court by Lex Greensill, the finance group’s founder, revealed the full extent of the reliance that Greensill had built up on BCC: amounting to $10.2bn of cover across 11 policy documents.
Credit Suisse last week released a statement saying Greensill only notified Lara Warner, the lender’s chief risk and compliance officer, on February 22 that the insurance would not be renewed — a week before the bank froze the funds.
Credit Suisse declined to comment. Marsh said in a statement late on Monday that the company “was engaged by Greensill as its insurance broker”, adding that its role “was not to be an insurer, banker, or credit analyst”.
“As Greensill’s broker, Marsh Ltd. sought coverage from insurers, who made their own determinations about what risks to cover,” Marsh said. “The two policies that were bound in February 2019 expired on March 1, 2021 and remained in effect for their full term.”