In its objection to the prospect that beleaguered insurtech Vesttoo would be allowed to make termination payments to some of its staff, fronting specialist Clear Blue Insurance Insurance Group revealed that it had paid at at least $23 million in commissions to Vesttoo entities that provided collateral for reinsurance deals.
Clear Blue and Vesttoo had entered into an agreement back in August 2022, with the insurtech planning to deploy as much as $1 billion of capacity, sourced from the capital markets, through Clear Blue’s property and casualty (P&C) programs over the following year.
On the emergence of claims of letter of credit (LOC) fraud, Clear Blue stated that it did not expect a material impact to its ratings from the ramification of the issues unfolding at Vesttoo, but said it could seek out more reinsurance to protect its surplus and capital.
Clear Blue, because of the relationship it had entered into with Vesttoo, was always assumed to be the fronting carrier with the highest potential exposure to the now assumed fraudulent Vesttoo-linked letters of credit (LOC).
Fronting specialists, such as Clear Blue, have been faced with the risk that reinsurance capacity required to support transactions would not be there, or at least that the collateral security would not be valid to support the functioning of their client programs.
Which drove the industry to scramble to replace coverage linked to Vesttoo, a process that is ongoing for some, as the uncertainty around the validity and integrity of letters of credit drove those exposed to move fast and seek to distance themselves from any issues.
Clear Blue said in late July that it had already managed to replace over half of the coverage needed, for reinsurance programs affected by collateral issues linked to Vesttoo.
The fronting specialist then sought to protect its rights under the bankruptcy courts, joining the case as a creditor to the Chapter 11 action involving Vesttoo entities.
Then, Clear Blue filed a motion of objection to the proposed termination payments that Vesttoo had wanted to make with the bankruptcy court.
But, as we reported last week, that objection was overruled and the judge sided with Vesttoo’s arguments and approved payment of the almost $800k of termination payments, to prevent any insolvency action occurring in Israel that could affect the Chapter 11 proceeding.
But a little more information was revealed throughout that process in the court, which is helpful in further laying bear the industry’s exposure to Vesttoo and the fraud that has occurred.
It also makes the kind of exposure Clear Blue’s business had to Vesttoo clearer and the capital it could be hoping to recover some, or all, of from the insurtech under the bankruptcy case.
Clear Blue stated that certain entities of Vesttoo were responsible for arranging and securing reinsurance capital and collateral for deals that had been transacted using the Aon White Rock Insurance (SAC) transformer and segregated accounts company.
It seems these involved some of the intellectual property reinsurance agreements that have been cited in White Rock’s court filings.
Segregated accounts for these transactions should have collateralized their obligations to Clear Blue, with the collateral sourced and provided by Vesttoo entities.
Letters of credit were sourced by Vesttoo affiliates and the affiliates in question were entitled to a commission for their services, for which Clear Blue has said it paid at least $23 million to date.
Certain of the letters of credit, it’s not apparent how many in the Clear Blue fronted deals or if it was all of them, were found to be counterfeit and not recognised by the banks that were supposed to have been their issuer, the company said.
The source of the fraud is still not known, Clear Blue explained, and the fronting specialist is working to evaluate what claims it may have against Vesttoo and its entities under the reinsurance agreements in question, where letters of credit were found to be fraudulent.
So, a little more information helps us in understanding the potential exposure the insurance and reinsurance sector has to the Vesttoo issue, with these and similar commission payments likely to make up some of the claims against it from creditors under the bankruptcy court.
But, as we also reported last week, Vesttoo had said that it only has around $30 million of cash available to it, meaning creditors are likely to be at least partially disappointed, unless the ongoing investigation into the fraud can find evidence of other capital held by the ultimate perpetrators of the fraud, once they are identified.