Aon recognises $197m Vesttoo related legal settlement expense charge

Broking giant Aon has recognised a significant legal settlement expense reserve amounting to $197 million related to the Vesttoo fraud scandal in its fourth-quarter of 2023 results.

It’s the first time insurance and reinsurance broker Aon has reported an expectation of the quantum of legal settlement costs it may need to pay, in relation to the forged letter of credit (LOC) in reinsurance issues.

Aon, as a key broker in the market, naturally worked on numerous deals where it has now turned out that Vesttoo supplied LOCs had been forged and their supposed collateral value never existed.

This has led to legal action and a prolonged bankruptcy case, with Aon having been in the firing line of some cedents whose reinsurance deals it had brokered or facilitated through its protected cell vehicle, but that turned out to be backed by the fraudulent collateral LOCs.

As we reported recently, Porch Group, owner of a homeowners insurer that found a letter of credit (LOC) backing its reinsurance deal with insurtech Vesttoo was forged, agreed a $30 million strategic arrangement with Aon that included releasing all claims related to the fraud it had against the broker.

That was the first sign of a direct cost to Aon due to the Vesttoo fraud issues.

Of course, Aon is also facing legal action from fronting specialist Clear Blue Insurance, the latest on which we reported yesterday, when we explained that Aon has filed a motion calling for the New York state lawsuit to be dismissed in its entirety.

But the broker is taking no chances and, in filing its Q4 and full-year 2023 results today, Aon has reported a $197 million charge in Q4 related to the chance of a growing financial burden from Vesttoo related legal settlements.

The company said, “In the fourth quarter of 2023, Aon recognized actual or anticipated legal settlement expenses in connection with transactions for which capital was arranged by a third party, Vesttoo Ltd., primarily in the form of letters of credit from third party banks that are alleged to have been fraudulent.

“Certain actual or anticipated legal settlement expenses totaling $197 million have been recognized in the current period, where certain potentially meaningful amounts may be recoverable in future periods.”

It shows Aon preparing its finances to deal with any continuation or expansion of the litigation it has faced after the Vesttoo fraud scandal, while also seeking to resolve the issues its clients have faced due to this fraud.

While the $197 million is a big number, this is really a reserve for potential charges and of course there are also recoveries to be considered, potentially from the value left in Vesttoo-linked structures or cells and the bankruptcy case, which will reduce any eventual cost to Aon.

Which also suggests the company is keen to find ways to proactively settle, to avoid any chance of prolonged and messy litigation with multiple parties and put this whole issue into the past.

As a reminder, Clear Blue had claimed that Aon, as broker and intermediary, should have confirmed the validity of reinsurance collateral supplied by letters of credit (LOCs) from Vesttoo that turned out to be forged.

Aon rejects these claims and as a result called for the lawsuit to be dismissed.

While the expense reserve charge recorded by Aon is perhaps a recognition of the need to put this issue behind the broker, it also drives home the significant industry impacts of this fraud scandal and the industry value destroyed by the improper actions of a few senior employees at Vesttoo and those that collaborated with them.

Also read: Aon aiming to strategically draw a line under Vesttoo issue: Andersen.

Read all of our coverage of the alleged fraudulent or forged letter-of-credit (LOC) collateral linked to Vesttoo deals.