Vesttoo case updates: Markel joins over $127.75m fraudulent letters of credit

Markel has now joined the Vesttoo bankruptcy proceedings, seeking remedies 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.

The creditor list is building in the Vesttoo Chapter 11 bankruptcy proceedings, with Markel taking the less typical route of announcing that its Markel Bermuda Limited (MBL) entity has filed to appear.

It means the list of Vesttoo bankruptcy creditors we now know about includes Clear Blue, Porch Group subsidiary Homeowners of America Insurance Company (HOA), now joined by Corinthian Groups Proventus Holdings LP, and United Automobile Insurance Co., while Aon’s White Rock also has a claim in the Chapter 11.

As we also reported yesterday, a Hong Kong investor group named Yu Po has been listed as a target for pre-trial discovery under the Aon White Rock Chapter 15 case that has been filed.

Markel Bermuda said yesterday that it has been appointed to this statutory committee of unsecured creditors, made up of the five entities above, in the chapter 11 bankruptcy in Delaware of Vesttoo Ltd. and its affiliates (Vesttoo).

Markel Bermuda said it has become involved in the bankruptcy case after two collateralized reinsurance transactions it entered into using White Rock Insurance (SAC) Ltd.’s segregated account platform.

The company entered into the two collateralized reinsurance transactions with White Rock for the benefit of a segregated account owned by a Vesttoo affiliate, Markel Bermuda explained.

The company ceded collateral protection insurance risk to the segregated account in question, which in return was supposed to provide reinsurance collateral to Markel Bermuda.

Letters of credit (LOCs) were provided to backstop the collateral needs of the segregated cell, to cover if any claims were made and not paid on the underlying policies for these transactions.

But, both of the letters of credit were later deemed to be fraudulent, one for $50 million and the other for $77.75 million, so for a total of $127.75 million of LOC value.

The two letters of credit in question both list an affiliate of Vesttoo as the applicant, on behalf of White Rock, with Markel Bermuda as the designated beneficiary, the company said.

After Vesttoo and affiliate entities filed voluntary chapter 11 bankruptcy petitions, Markel Bermuda has now started to explore remedies against third parties, including Vesttoo under the chapter 11, that may be available so that it can either mitigate or eliminate the potential losses stemming from the fraudulent letters of credit.

Markel Group said it, “does not expect that losses arising from these fraudulently tendered letters of credit will have a material adverse impact on its results of operations, financial condition or liquidity.”

Markel’s been very transparent here in how it is approaching the Vesttoo case and we should perhaps expect additional detail, in terms of claims and remedies being sought, over the coming weeks as the Chapter 11 case continues.

Separately, at a bankruptcy case hearing yesterday, the judge overruled objections that fronting specialist Clear Blue had to Vesttoo making termination payments to some of its staff.

Vesttoo had already been approved to make some $2.79 million of payments to staff, including certain employee benefits and expenses, but at the time could not get approval to make termination or exit payments to those it had sacked or had left.

Originally, Vesttoo was seeking to make some $2.2 million in termination payments, but that was cut down by the company to just under $800k, in order to try and win the courts approval.

But, Clear Blue objected to this and despite lawyers for both sides mediating, no agreement could be made and Clear Blue filed a motion to stop the extra termination payments.

But, at yesterday’s Chapter 11 court hearing, 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.

The judge said the debtor had met the burden of proof that imminent harm could occur if these payments weren’t made and she also commended the debtor, Vesttoo, for its willingness to negotiate on this.

The first creditor hearing is due in September and by then we should find out much more on the individual claims being made.

However, it is noteworthy that during yesterday’s hearing, counsel for White Rock expressed concern at Vesttoo saying that it only had $30 million of cash available to it, given White Rock alone had handed over some $136.7 million in premium for the reinsurance deals it is seeking reparations for.

If the $30 million is all of the cash and value left in Vesttoo, after all of the reinsurance deals it had entered into, it does not leave much left for the creditors to make up for the losses they are facing from the issue.

While the remaining premium sums that had been paid to alleged investors appear to now be missing, or to have been siphoned off by whichever fraudulent actors are responsible.

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