IAG (ASX:IAG) share price takes wild ride on Greensill fears

The Insurance Australia Group Ltd (ASX: IAG) share price is on a roller coaster today over Greensill fears.

| More on:
asx share price bounce represented by investor being bumped along volatile price chart

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Insurance Australia Group Ltd (ASX: IAG) share price is on a roller coaster today. Shares in the insurer crashed 10.6% to a 5-year low of $4.30 before being placed in a trading halt. Since resuming trade, the share price is at $4.60, almost 5% down on yesterday’s close.

In contrast, the S&P/ASX 200 Index is up 0.47%.

Let’s take a closer look at what is weighing on the IAG share price.

IAG and Greensill’s insolvency

As previously reported, Greensill was a supply-chain debt provider. Its business model was to provide funds to suppliers awaiting accounts receivable in the form of a loan to the purchasing business.

As with the 2008 financial crisis, Greensill collateralised these debts into securities and sold them to investors. Greensill became too reliant on a few companies and when COVID-19 hit, many loanees were unable to repay their debts.

According to the Australian Financial Review (AFR), BCC (an insurer IAG had a 50% stake in) sold policies to Greensill in 2019 covering the bonds. However, as IAG clarified in an announcement to the ASX, “it has no net insurance exposure to trade credit policies including those sold through BCC to Greensill entities.”

IAG sold BCC in April 2019 to Tokio Marine Management (TMM) and completed the transaction by July. IAG informed the market TMM retained the risk for all policies during this period – including Greensill. Both BCC and IAG refused to renew their policies with Greensill this year. Greensill admitted in court the move was catastrophic. That was the catalyst for its insolvency.

Before IAG released its statement today, investors were panicking. Many believed IAG may be liable for the bad debts owed to Greensill. Fearing the worst, owners sold off their holdings in the insurer. IAG then placed its shares into a trading halt.

When IAG informed the market no such liabilities existed, many came flocking back on the resumption of trade.

Simply put, as more investors were selling IAG shares than buying, the price collapsed. When more investors began purchasing IAG shares than offloading, the price increased. In economics, this is known as the laws of supply and demand.

IAG share price snapshot

Today aside, IAG’s share price has been sliding for the past year. One year ago, the insurer’s share price was $6.36. At today’s price, this calculates as a 27% loss in value. In fact, in mid-2018, the IAG share price was around the $8.80 mark.

IAG has a current market capitalisation of $11.7 billion.

Motley Fool contributor Marc Sidarous has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Share Market News

Business woman watching stocks and trends while thinking
Share Market News

5 things to watch on the ASX 200 on Wednesday

It will be another busy day on the ASX 200 on Wednesday...

Read more »

Two couples having fun racing electric dodgem cars around a track
Share Market News

Here are the top 10 ASX 200 shares today

These 10 ASX 200 shares outperformed all others on Tuesday.

Read more »

A hip young guy works at his home workstation with two screens and a gamers chair, keeping an eye on his crypto investments.
Cryptocurrencies

This is why Ethereum has been outpacing the Bitcoin price gains. Will it last?

The Ethereum blockchain may make its long-awaited transition to a Proof of Stake protocol next month.

Read more »

a hand reaches up from a large pile of papers.
Share Market News

Here are the 3 most heavily traded ASX 200 shares on Tuesday

The ASX's lithium losers are leading our trading volume charts today...

Read more »

A group of people in suits and hard hats celebrate the rising share price with champagne.
Resources Shares

3 ASX mining shares rocketing higher today on new finds

The three miners have each reported promising new drill results.

Read more »

A mining worker wearing a hard hat, orange high vis vest and blue long-sleeved shirt raises his fists in celebration with an excited expression on his face
Share Market News

The BHP share price now trades on a fully franked dividend yield of 11%

The mining giant reported the second biggest profit in its history today.

Read more »

red percentage sign with man looking up which represents high interest rates
Economy

ASX 200 shrugs off prospect of further rate rises revealed in RBA minutes

The RBA board expects inflation in Australia to peak later and higher than it previously thought.

Read more »

Smiling man with phone in wheelchair watching stocks and trends on computer
Share Market News

5 things to watch on the ASX 200 on Tuesday

Here's what to expect on the ASX 200 on Tuesday...

Read more »