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AM Best to review fronting collateral in light of Vesttoo news


Rating agency AM Best has said that it will review the collateral arrangements of all fronting companies that it provides ratings for, in light of the claims that collateral involved in transactions facilitated by Vesttoo could be fraudulent.

vesttoo-am-bestAM Best said it is “Monitoring the rapidly evolving situation and reviewing its rated fronting carriers and other insurers that have material amounts of reinsurance counterparty credit risk and reliance on various forms of collateral.”

“Based on this review, rating actions will be taken as warranted,” the rating agency added.

With multiple letters of credit (LOCs) backing Vesttoo reinsurance participations in programs now thought to be fraudulent or forged, there is a risk to fronting specialists that capacity is not there to support the functioning of client programs.

Fronting specialist MS Transverse had stated that Vesttoo only participates directly on one program with it and that this business is fully collateralized with cash, so any exposure to collateral issues at the insurtech is “immaterial.”

While fronting firm Clear Blue Insurance Group said it does not expect a material impact to its ratings from the ramifications of the issues at Vesttoo, but that the company may seek out more reinsurance to protect its surplus and capital.

Most recently, program fronting player Obsidian said any exposure to the Vesttoo issue would be “de minimus.”

AM Best noted that when it reviewed fronting carriers recently it found that “14 of the 19 companies analyzed ceded more than 85% of their business to reinsurers, resulting in elevated credit risk on counterparties to provide cover when claims arise.”

The rating agency stated, “If risks are not initially assessed properly, the fronting company can be subject to residual tail risk, which could strain the collateral. Credit risk associated with reinsurers can be mitigated through the use of highly rated reinsurance panels, tight exposure limits, a regular review of collateral and letters of credit, trust agreements, etc. Effective fronting companies demonstrate their value through robust ERM practices, strong underwriting capabilities, effective reinsurance programs, and a focus on managing credit risk.”

AM Best also noted that the “details and scope of this issue remain unclear” but said the quality and support of collateral is always part of its reviews of carriers reinsurance arrangements.

Recall, that AM Best recently provided a preliminary investment grade rating to the recent offering of Vesttoo Bermudian Bay Ltd. (Vescor Series 2023-1) notes. Those notes are now not going to be issued, we understand.

We’re told that AM Best is not the only entity now reviewing collateral arrangements, in light of the news of potentially forged letters of credit (LOC) finding their way into the market, with brokers and other firms assessing client reinsurance arrangements to ensure their integrity.

Also read:

July 25th – Fronting company Obsidian says Vesttoo exposure “de minimus”.

July 24th – Clear Blue: No material rating impact from Vesttoo issue. Reinsurance may be required.

July 21st – Vesttoo: Multiple LOCs from one bank in focus. Failure of security controls or KYC?

July 20th – MS Transverse: Any exposure to Vesttoo LOC collateral issues “immaterial”.

July 20th – Vesttoo: Collateral damage.

July 19th – Vesttoo: New report claims significant amount of forged LOCs. The question is how?

July 18th – Vesttoo faces fraudulent collateral claim. Confirms investigation, exit of some leaders.

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