December 11, 2023

Ratings agency AM Best said it intended to review the collateral arrangements of all front companies it rated, given the potential for fraud in the collateral involved in the transactions facilitated by Vesttoo.

Westo BestAM Best said it was “monitoring the rapidly changing situation and reviewing its rated front-end carriers and other insurers with significant reinsurance counterparty credit risk and reliance on various forms of collateral.”

“Based on this review, rating action will be taken if necessary,” the rating agency added.

With multiple Letters of Credit (LOCs) backing Vesttoo Reinsurance’s participation in schemes currently considered fraudulent or bogus, front-end specialists are at risk of not being able to support client scheme operations.

Frontier expert MS Transverse said Vesttoo was only directly involved in one of its schemes and that the business was entirely cash-collateralized, so any collateral issues the insurtech faced were “irrelevant”.

While representative firm Clear Blue Insurance Group said it did not expect the fallout from Vesttoo’s problems to have a material impact on its ratings, the company may seek additional reinsurance to protect its surplus and capital.

Most recently, showrunner Obsidian said any exposure of Vesttoo’s problems would be “minimal”.

AM Best notes that a recent review of front-end insurers found that “14 of the 19 companies analyzed transferred more than 85% of their business to reinsurers, resulting in elevated credit risk for counterparties who insure when claims arise.”

According to the rating agency, “if risks are not initially properly assessed, front companies may be exposed to residual tail risk, which may stress collateral. Credit risk associated with reinsurers can be mitigated through the use of highly rated reinsurance teams, stringent risk limits, regular reviews of collateral and letters of credit, trust agreements, etc. Effective front companies demonstrate their value through robust enterprise risk management practices, strong underwriting capabilities, effective reinsurance programs, and a focus on credit risk management.”

AM Best also noted that “the details and scope of the issue remain unclear” but said the quality and backing of collateral is always part of its review of carrier reinsurance arrangements.

Recall that AM Best recently assigned a preliminary investment grade rating to the recently issued notes of Vesttoo Bermudian Bay Ltd. (Vescor Series 2023-1). As far as we understand, these notes will not be issued at this time.

Also read:

25 July – Front office Obsidian says exposure of Vesttoo is “minimal”.

July 24 – Clear Blue: Vesttoo issues have no material impact on ratings. Reinsurance may be required.

21 July – Vesttoo: Multiple LOCs of one bank come into focus. Security controls or KYC failure?

20 July – MS Transverse: Any Vesttoo LOC collateral exposure is “immaterial”.

July 20th – Vesttoo: Collateral damage.

July 19th – Vesttoo: New report claims a large number of fake LOCs. The question is how?

July 18 – Vesttoo faces fraudulent collateral claims. Confirmation of the investigation, some leaders withdrew.

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