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Bank at heart of Vesttoo situation grew LOC issuance significantly in 2022


The China Construction Bank (CCB), which is the main bank named in relation to the fraudulent letter of credit (LOC) scandal involving insurtech Vesttoo, grew its activities significantly as an LOC issuing and confirming bank in 2022, rating agency AM Best noted.

vesttoo-collateral-safeChina Construction Bank (CCB) was the first bank named in relation to fraudulent or forged letters of credit (LOCs) that had been used to back collateralized reinsurance deals facilitated by Vesttoo.

It was the bank named where a cedent of an Aon brokered intellectual property (IP) transaction had turned up at its New York branch, seeking information on the LOC backing its deal, only to be told that the LOC in question was not valid and the CCB staff claimed no knowledge of it.

While other banks have now been named in relation to the LOCs issued to support Vesttoo facilitated collateralized reinsurance deals, Standard Chartered and Banco Santander being two other names, China Construction Bank (CCB) is the one that has come up repeatedly and the most.

Previously, we reported that ALIRT Insurance Research had undertaken an analysis of filings to hunt for China Construction Bank (CCB) issued letters of credit (LOCs) in use among US insurers.

ALIRT found more than $1.3 billion of them, but said at the time it is challenging to tell how much of that LOC issuance was associated with Vesttoo linked reinsurance deals, or potentially fraudulent.

Now, rating agency AM Best has undertaken similar analysis of LOCs in issuance, but has also looked at how banks have grown their activities in this space as well, finding that China Construction Bank (CCB) grew significantly last year.

Which would coincide neatly with the traction Vesttoo had been seeing, as a significant amount of its reinsurance trading activities had occurred in 2022 and into 2023 and that is the time when the insurtech really started to make headway, in deal terms.

AM Best said that, on the analysis undertaken and its findings, “Aalthough it cannot identify which bank LOCs are related directly to Vesttoo transactions, a broad analysis shows that LOCs against business with unaffiliated reinsurers account for 22% of total collateral held.”

Adding, “The 2021-2022 data also shows insurers have added some new banks to their roster of LOC providers, and that the growth in LOCs by some banks has been notable, and particularly at China Construction Bank Corp., which increased its LOC exposure by $1.2 billion in 2022 and has been named in published news reports.

“The data also shows companies with LOC exposure to China Construction Bank Corp., totaling nearly $1.3 billion for the U.S. insurance industry.”

In 2021, China Construction Bank was only involved in the issuance of some $77,195 of reinsurance collateral backed by its LOCs.

But, in 2022, that figure soared to $1.28 billion, growth of some 1,560% in just one year and signalling a much more significant use of the bank by some in the reinsurance market.

As AM Best noted, it’s not possible to understand what proportion of LOCs issued by CCB were linked to Vesttoo facilitated reinsurance deals, but given the CCB growth in LOC issuance has coincided with Vesttoo’s traction increasing significantly, it seems safe to assume it is a reasonable share.

Standard Chartered Bank, one of the other banks named in relation to the Vesttoo situation, had issued $1.28 billion of LOCs to US carriers in 2021 and that increased to $1.31 billion in 2022, so it had not seen the same growth spurt as CCB last year.

The rating agency said, “The Vesttoo situation, which entails allegations of fraudulent LOCs, highlights the importance of carefully managing counterparty credit risk. Cedents should conduct appropriate due diligence on counterparties and contracts, as well as collateral reviews.”

AM Best also reminded that it is, “Monitoring the evolving situation and reviewing its rated fronting carriers, as well as other insurers that have material amounts of reinsurance counterparty credit risk and reliance on various forms of collateral.”

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

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