Vesttoo assets for liquidation said below $25m. Creditor focus may shift

We’re told that the sum total of assets and so value that could be distributed in Vesttoo’s pending liquidation under the bankruptcy proceedings, is estimated to be below $25 million, which suggests creditors that lost significant value due to the reinsurance letter of credit (LOC) fraud are likely to be left unsatisfied, so may look elsewhere for potential recoveries.

It’s not clear whether the estimate for the amount of assets that could be distributed to creditors includes any sum from a potential sale of any technology or intellectual property, from the beleaguered insurtech.

We have been told that such a sale process, which appeared on the cards only a few weeks ago, is now looking less likely, with Vesttoo and the creditors instead thought likely to push forward towards a rapid liquidation again.

There is a slim chance of some kind of technology sale being achieved we understand, but one source told us that even if that does occur, it’s not likely to increase the value of the bankruptcy estate by very much anyway.

As a reminder, during this whole fraud debacle involving Vesttoo, the sums of reinsurance premiums involved that have been lost by parties, or of reinsurance limit that was proven to have zero value due to its collateral being fraudulent, have been in the hundreds of millions and even billions of dollars.

So, $25 million being available for potential recovery across the various creditors with claims to the bankruptcy proceedings, is not going to go a long way towards satisfying any that feel aggrieved.

As we reported back in September, in total, almost $3.36 billion of standby letters of credit (LOC) are assumed to be fraudulently created, $2.81 billion purportedly from China Construction Bank, $362.5m purportedly from Standard Chartered Bank and $186m purportedly from Santander.

Precisely how much reinsurance limit those LOCs were supposed to be backing, is less clear. But at least that sum seems the most likely answer.

Other figures that have come to light throughout the fraud saga and that provided a glimpse at the value destruction that occurred because of the fraudulent practices of some senior executives at Vesttoo, include:

• Aon seeking a $136.7 million return of collateral related to fraudulent LOCs.
• Markel joining the bankruptcy proceedings as a creditor after two letters of credit (LOC) totalling $127.75 million in value were found to be fraudulent in collateralized reinsurance transactions it had entered into.
• Markel then reporting a $25 million credit loss against a fraudulent $50 million letter of credit (LOC) for reinsurance provided by Vesttoo, and suggesting a chance that more could come from a second fraudulent LOC.
• Porch Group realising a $48.2 million charge in its second-quarter results and pursuing $300 million of collateral from a letter of credit (LOC) used for a Vesttoo deal. Porch also had to make a significant investment into its Homeowners of America insurance company.
• Fronting specialist Clear Blue taking a $10.7 million write-down linked to Vesttoo transactions, while also seeing its surplus decline and then needing a $25 million capital injection.

There will be others that we’ve forgotten from the last few months, as slivers of information have emerged about the scale of the impacts to the insurance and reinsurance industry and the ramifications of the Vesttoo fraud became clear.

But, just from the above examples, it’s very clear that $25 million to be divided among the creditors will not go a long way and far from makes anyone whole again.

That’s not to mention the costs incurred in replacing affected reinsurance and collateral, or in legal fees paid.

Because of this, it seems increasingly likely that litigation elsewhere in the value-chain of transactions undertaken with fraudulent Vesttoo letters of credit (LOC) involved, will step up, as the focus for those that have lost significant sums shifts to other parties deemed to have failed in their security controls and checking of collateral validity.

A number of parties have hinted at litigation being ongoing, or ready to be filed and various parties injured by the fraud have said that they intend to continue investigating where processes failed and where reparations may be deemed owed.

The focus has rightly been on Vesttoo, as the company at the heart of the fraudulent letter of credit (LOC) scandal, but creditors have not forgotten the failure of the industry’s KYC protocol and that could mean ongoing action, although perhaps behind closed doors and harder to track.

In addition, criminal cases and personal lawsuits may also be filed against those behind the fraud, on top of those already filed by Vesttoo against its former senior executives that were identified as having been involved.

Ultimately, it seems efforts to recover value are so far not delivering much to those harmed the most by the LOC fraud.

The question now, will be whether there is more action to come, given the creditors are still performing discovery on other parties in the chain, that could commence as the focus on the potential for recoveries shifts beyond the insurtech as it gets liquidated.

We understand the bankruptcy court will need to agree on a plan of liquidation and that may not happen until later in December, so there is still plenty of time for the direction to change. As we’ve seen throughout this case, priorities and strategies are shifting all the time, as those involved seek the best possible outcomes.

It’s worth remembering, that just a couple of weeks ago, Vesttoo had claimed in court filings that it held roughly $57 million of cash in early November, while it believes another roughly $15 million may have been recoverable from certain “bona fide investment deals” that were still outstanding and it may have been owed money from.

Why that has now reduced to an estate liquidation estimate of around $25 million is unclear.

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