Vesttoo faces fraudulent collateral claim. Confirms investigation, exit of some leaders

Vesttoo, the insurtech that has been working to connect capital markets with diverse types of re/insurance risk, has come under scrutiny after claims of fraudulent collateral emerged in an Israeli tech publication yesterday.

The claims first made in CTech, by publisher Calcalist, state that “billions of dollars in collateral” are involved, which is a very high figure for a company at the stage of Vesttoo’s development, and state that these billions presented the by the company were “fraudulent”.

The publication said that an initial investigation was underway, discovering this “fraudulent collateral” and that “the collateral claimed by the company was found to be virtually nonexistent.”

Artemis reached out to Vesttoo for comment and received the following response, acknowledging an audit is in progress.

“The Vesttoo team discovered inconsistencies between an investor and a cedent in transactions that Vesttoo modeled the risk for.

“We take the integrity of our business very seriously and are conducting a comprehensive third-party audit to ensure our due diligence processes continue to be robust.”

It’s not immediately clear the scale of this claimed collateral issue, as for billions of dollars to be affected, as the publisher claims, it would suggest something affecting numerous Vesttoo deals.

In insurance-linked securities (ILS), where transactions are largely fully-collateralised and backed one-for-one with collateral, or mostly-collateralised minus the upfront premium payments or any benefits of leverage, any inconsistency or error can be a critical problem for the integrity of a deal.

It can lead to a collateral shortfall, meaning insufficient funds are available for paying any claims, or for the investors to recover as deals mature.

It can also affect the value of investments, of course, meaning third-party investors do not really have the value they had been marking in their books.

The knock-on effects of any collateral related error or issue is particularly important for cedents, in terms of capital credit, as they might need to evidence the collateral is available as part of their protection or solvency, and could face shortfalls in these where collateral is found lacking.

We had understood previously that Vesttoo often used letters of credit (LOC’s) within its transactions, with a bank providing those and investors interfacing with that bank. Were that the case, within any transaction(s) in question, it would seem that any bank process involved could come under some scrutiny as well.

Vesttoo’s transactions were focused on diversifying areas of insurance and reinsurance, so not the property catastrophe risk that is more typical of the ILS market and catastrophe bonds. Its transactions were also private in nature, not 144a regulated securitizations like the cat bond market.

Israeli newspaper Globes provides a little more information and another claim, suggesting that Vesttoo’s Board has instigated the audit into the alleged fraud, and stating that the suspicion is “guarantee documents presented in order to get deals done were forged.”

Vesttoo confirmed in its statement that the fall-out of this audit has already led to a number of senior departures from the company.

“A few members of the leadership team have decided not to wait for the results of the audit and have decided to leave, and we respect their decision,” the company said.

We won’t speculate as to what has actually occurred here. At this stage it is all claims and information is limited.

But it is important to state that the collateralisation of reinsurance and risk transfer for the issuance of insurance-linked securities (ILS) is one of the very fundamentals of the ILS market and an area where compliance is absolutely critical.

Update: In an expanded statement, Vesttoo highlighted that the inconsistencies mentioned were “in the collateral provided by banks” for the transactions in question.

The company explained, “We want to be clear that the collateral in question relates to LOCs provided under certain specific transactions and were not issued by Vesttoo rather by reputable international banks.”

Vesttoo also said, “We would like to emphasize that we are actively working with our clients and all organizations involved to provide full transparency in this matter and find alternative solutions as soon as possible.”

Also read: Our follow-up from Wednesday 19th, Vesttoo: New report claims significant amount of forged LOCs. The question is how?