Porch Group, the software driven financial services group with a homeowners insurance arm that was impacted after a letter of credit (LOC) backing a reinsurance deal it had entered into with insurtech Vesttoo was found to be fraudulent, is intending to pursue damages vigorously and not just against Vesttoo, it seems.
Executives noted that their legal action will extend beyond just the insurtech at the heart of the global reinsurance letter of credit fraud, while also noting that Porch will change its reinsurance broker, suggesting it may look there for damage claims as well.
Recall that, Porch had revealed that its Homeowners of America Insurance Company (HOA) subsidiary had an exposure to reinsurance contracts arranged via Vesttoo.
As a result, the company realised a charge of $48.2 million in its second-quarter results and said it was pursuing $300 million of collateral from a letter of credit (LOC).
The company had reported that Homeowners of America Insurance Company (HOA) replaced 84%, or $147 million, of the reinsurance limit affected by the Vesttoo fraud issues, but was still placed under temporary regulatory supervision.
After which Porch said that it had made a cash investment of $57 million in HOA, in exchange for a $49 million surplus note from HOA and the acquisition of HOA’s rights to potential claims stemming from the fraud connected to Vesttoo and others, while it also joined the insurtech’s bankruptcy proceedings as a member of the official creditor committee.
Last week, Porch’s homeowners carrier HOA came out of regulatory supervision, while also receiving an A, Exceptional Financial Stability Rating from Demotech.
“HOA is now out of TDI supervision, with a strong Q3 in the books with a 39% gross loss ratio and 58% combined ratio, and the A rating from Demotech. Recovering so quickly after the Vesttoo fraud reiterates the strength of our business – that the financial performance, healthy surplus, reinsurance program, and go-forward business plan are sound. We appreciate and value the partnerships with both Demotech and TDI and look forward to continuing success,” Matt Ehrlichman, Chief Executive Officer said at the time.
During the Porch Q3 earnings call, Ehrlichman and other senior Porch executives discussed the Vesttoo issue and said that continuing to pursue claims against the insurtech and others remains a priority.
Ehrlichman said that the Vesttoo scandal was a “headwind” that couldn’t be foreseen and an “unexpected challenge”, further saying, “I want to give a tremendous credit to our team who’s been focused on this, who worked with the TDI expeditiously to respond to their questions and enabled a move out of supervision quickly.”
Ehrlichman also said that the company has now fully replaced the reinsurance limit it lost after the Vesttoo deal had to be terminated, “Our reinsurance team did an excellent job, post the Vesttoo termination, going out to the third-party reinsurance market and refilling our excess-of-loss stack and bringing other top tier, grade-A reinsurers into that program.
“So we have fully rebuilt that program and have had that in place for a while now, to make sure that we are protected.”
Shawn Tabak, CFO at Porch, explained that the work to recover damages is ongoing and involves more parties than just Vesttoo.
“Last quarter, we discussed that HOA had a reinsurance contract for which Vesttoo arranged capital. Vesttoo has since filed for bankruptcy in U.S. Federal Court and admitted that its team committed a massive fraud impacting many in the industry,” Tabak said.
Adding that, “As soon as we learned of these issues, our team quickly mobilised to assess the situation, terminate the contract and maximise recovery.
“We assembled a task force, charged with recovering funds, replacing reinsurance cover and addressing the TDI supervision order. HOA was also appointed by the U.S. bankruptcy trustee to a 5-member creditor committee that is currently empowered to investigate Vesttoo, the banks and others and seek recoveries.”
Tabak went on to say, “This approach will help all creditors pursue recovery while managing the costs associated.”
Then explained that, “We are currently intending to vigorously enforce our rights and pursue all damages. At the right time, we will provide more information on the law firm, the specific companies that we will be pursuing with claims and litigation and which reinsurance broker we anticipate working with going forward.”
That latter comment suggests Porch is changing its reinsurance broker in-light of the issue with the Vesttoo reinsurance fraud, which might also point to an avenue the company could explore the potential for seeking damages.
“We are also pursuing other avenues of recovery, which I will not comment on further at this time,” Tabak said.
Given the quantum of losses and damages, across all creditors, in this fraud, it seems likely ceding companies are in particular going to pursue damages from multiple parties, as it’s hard to believe the Vesttoo bankruptcy will make any of them feel whole again.