Root says could commute Vesttoo-linked reinsurance, retain risk if needed

Root Insurance, the auto lines focused insurtech that also bundles coverage with renters and homeowners products, has exposure to a reinsurance arrangement with links to Vesttoo, but the company’s CFO said it would feel comfortable commuting that and retaining the risk, if it needed to.

Recall that risk ceded by Root Insurance to Corinthian Re’s reinsurer Osprey Re was a significant feature underlying the recent attempt by Vesttoo to issue a rated non-cat casualty insurance-linked securities (ILS) arrangement.

That Vesttoo Bermudian Bay Ltd. (Vescor Series 2023-1) ILS deal has naturally never been issued, given the emergence of the collateral letter of credit (LOC) validity concerns linked to collateralized reinsurance arrangements that Vesttoo facilitated.

The fall-out from the alleged fraud involving LOCs backing reinsurance continues to manifest across the insurance marketplace, with a number of mentions during earnings call in the last week.

Insurtech Root is one of those, acknowledging its exposure via a reinsurance deal, which is presumably its quota share arrangement with Corinthian’s Osprey Re. Corinthian being a company that has been particularly transparent throughout these collateral LOC developments.

Speaking during the earnings call yesterday, Root’s CFO Megan Binkley said, “As it relates to the letters of credit (LOC) issue, we became aware of the allegations of fraudulent collateral in connection with Vesttoo a couple of weeks ago and firstly, I just want to make sure that it’s clear that Root has no direct relationship with Vesttoo.

“We do have one reinsurer that is potentially impacted.”

She went on to explain that, at Root, “We’re constantly evaluating our reinsurance structures to ensure that we’ve got the right terms for the business and over the past 18 months we’ve been decreasing our external cession percentage as the business has been improving.

“So, as we look at this, the worst case scenario for us would be, for this particular reinsurer, would be for us to exercise our right to commute the deal and we believe that we could do that with a minimal overall impact to the financial statements given our loss ratio performance.”

Binkely went on to highlight that Root has the necessary capital to retain a chunk of its business like this.

Saying, “We’ve got a strong balance-sheet and we’re ready and able to take back this business onto our books if necessary, which would actually further support underwriting profitability over the long term.

“So, I would say, our longer term strategy is to continue to retain more business and reduce our reinsurance costs going forward. So this is actually consistent with our existing plans.”

As an aside, given Root exposure, presumably related to the reinsurance arrangement in question, was set to be a significant feature of the Vescor 2023-1 rated ILS notes, it is interesting to note that had that ILS transaction made its way to market, the collateral underpinning the arrangement would have been fully-collateralized, had the normal ILS market norms been followed.

There will be numerous other cedents out in the market trying to assess the impact of a reinsurance deal that is underpinned by collateral with zero value at this time. Not all will be in the position to commute and retain, with replacement covers being widely sought, we understand.

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