Trade-credit insurers are preparing for a challenging period as the fallout from the bankruptcy of First Brands Group becomes clearer. The U.S. auto-parts supplier, known for its reliance on invoice financing, has left insurers facing a tangled web of claims connected to its off-balance-sheet financing structure.
First Brands’ business involved selling customer invoices for cash while using funds from third-party investors to pay its suppliers. This style of financing has become popular as lenders and funds seek short-term, asset-backed opportunities backed by insurance. Major insurers like Allianz, Coface, and AIG had provided coverage for parties involved in First Brands’ receivables programs. Some insurers had already started pulling back coverage months before the company’s bankruptcy filing, spotting early payment issues in one of its subsidiaries.
Despite insurers trying to assure the market that exposure to First Brands’ financing isn’t significant, experts warn legal battles could drag on. These disputes usually hinge on what policyholders were required to know and disclose. Unlike cases involving fraud, which can void insurance coverage, First Brands has not been accused of any wrongdoing. Policies often require proof that executives were aware of any issues and failed to inform insurers. Past incidents, such as the Parmalat collapse, showed insurers paying claims when they couldn’t prove client misconduct.
The U.S. Justice Department has opened an inquiry into First Brands, but it is still in the early stages. Any regulatory scrutiny on invoice financing and related insurance could change how insurers underwrite these deals in the future.
For those handling renewals and claims, the immediate task is complicated. They need to track invoices sold through multiple programs, check if any invoices changed hands more than once, and ensure contract terms line up properly. This work could be time-consuming and could strain relationships between lenders, insurers, and brokers.
Looking at the bigger picture, trade-credit insurance has performed well in recent years. Insurers like Coface and Atradius have enjoyed loss ratios far better than many other lines of insurance. However, the outlook is shifting. Corporate failures are expected to rise by about 10% in 2024 and another 6% in 2025, which will likely increase claims and costs. Pricing in the market has not fully adapted to this change, creating some financial pressure.
Reinsurance arrangements and accounting rules will also influence insurer profits. Legal disputes, such as those following the Greensill Capital collapse in 2021, have shown how policy wording and documentation gaps can stretch claims resolution over many years.
At the heart of the matter is how insurers and investors respond to the First Brands case. If claims are paid smoothly, confidence in trade-credit insurance could grow. If not, the industry may face more skepticism about the reliability of these products. Either way, this situation is likely to affect how insurance coverage is structured and priced for receivables finance going forward.