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Vesttoo fallout likely to have lasting effect on market


Fronting insurers and others will likely tighten their controls in the wake of alleged fraud that surfaced last month involving Vesttoo Ltd., but some in the industry were surprised sufficient measures weren’t already in place.

While experts say it is too soon to evaluate the magnitude of the shakeout from disclosures that letters of credit issued in transactions involving the online reinsurance intermediary were allegedly fraudulent, several companies last week scurried to restructure their Vesttoo-related deals and others prepared for litigation.

Some experts say the fallout could be significant, but much will depend on whether widespread fraud is discovered. At the very least, they say, industry companies will increase due diligence in fronting situations.

Among several companies disclosing connections to Vesttoo, Aon PLC disclosed Friday that clients are suing the brokerage over transactions involving the Tel Aviv, Israel-based intermediary.

Vesttoo connects cedents with investors for noncatastrophe insurance-linked securities and collateralized reinsurance coverage. Some LOCs provided through a Chinese bank to support Vesttoo’s transactions were allegedly fraudulent.

Fronting insurer Clear Blue Insurance Group in Charlotte, North Carolina last week said it was aware of allegations that LOCs issued by China Construction Bank for reinsurance collateral on behalf of Vesttoo were fraudulent.

A.M. Best Co. Inc. last week placed Clear Blue’s A- ratings under review with negative implications, “given the current uncertainty around Clear Blue’s ability to rely on certain letters of credit, posted to back reinsurance placed by Clear Blue with certain reinsurers.”

Vesttoo said in a statement that its investigation into the issue continues, but that “at a minimum” its procedures were circumvented.

Credit rating agency DBRS Morningstar estimates that, based on Vesttoo’s $200 million in 2022 revenue, the total size of the platform could be between $5 billion and $10 billion.

Macon, Georgia-based Corinthian Group, a group of specialty collateralized reinsurance companies, said in a statement that Vesttoo has “historically been a notable source of financial capacity for reinsurance programs through a Corinthian vehicle” and it “was incredibly surprised and disturbed” by the allegations.  

The company is investigating the allegations to evaluate the potential impact on programs it is involved with and said it has been in contact with law enforcement authorities.

Corinthian said its counsel advised the company that its financial responsibility for the LOCs is unclear, as well as whether Vesttoo has sufficient financial capacity to satisfy its obligations to Corinthian vehicles. It may take several months to complete the investigation and resolve the issue, it said.

On Beazley PLC’s earnings call last week, CEO Adrian Cox said, “On Vesttoo, we don’t share much about our reinsurance purchasing or comment about rumors on it.”

He said the company is confident in the reinsurance coverage that it buys and continually monitors its effectiveness.

“Hypothetically, if we had reinsurance with a counterparty whose collateral was impaired, noting that no loss has happened, what we could do is to cancel and replace that reinsurance with another counterparty,” he said. “The only thing at risk would be the premium that we paid the first counterparty, which we would then attempt to recover. So, were we in that sort of situation, that is what we could and what we would do.”

Marcos Alvarez, Madrid-based senior vice president, global head of insurance, for DBRS Morningstar said it is “strange” that the LOCs in question were not properly vetted.

“There are ways to properly check letters of credit,” he said.

Sridhar Manyem, director, industry research and analytics for Best, said in a statement, “We’ve seen some pullback in capacity in certain pockets” within the delegated underwriting authority enterprise segment. “At this point, it doesn’t seem to be a whole retrenchment.”

“It’s going to send a wave of due diligence over all rated fronting situations,” said Sandy Bigglestone, deputy commissioner of the Vermont Department of Financial Regulation’s captive insurance division in Montpelier.

Vesttoo “is a reminder of the need for oversight and caution in ceded reinsurance activity, particularly for fronting carriers that are most reliant on reinsurance relationships to execute their business model,” said James Auden, Chicago-based managing director of insurance at Fitch Ratings Inc.

Ryan Specialty LLC President Timothy W. Turner said the situation obviously “has widening ramifications if true.” It “has a lot of tentacles and everyone’s investigating it,” but there has not been any evidence of its magnitude.

“Most of us are just proceeding cautiously and alerting our clients and our insureds that this has happened, and we’re watching it carefully,” he said.

The situation “may cause people to look a little bit harder at fronting insurers,” said Scott Seaman, a partner with Hinshaw & Culbertson LLP in Chicago. 

Matt Kramer, New York-based president and CEO of Ascot Insurance U.S., said he is “starting to see a lot of challenges focused on the fronting marketplace.” There needs to be a flight to quality and focus on well-capitalized companies, paying attention to credit risk “and not just passing it off to reinsurers.”

Regulators and the industry may also respond to the situation by making entities more comfortable with the quality of collateral, said Gregory A. Markel, a partner with Seyfarth Shaw LLP in New York.