June 25, 2024

ALIRT Insurance Research discovered more than $1.3 billion in letters of credit (LOCs) from the China Construction Bank (CCB) during their investigation into U.S. insurer documentation for probable Vesttoo links. The bank is a key figure in the unfolding Vesttoo collateral fraud situation. However, ALIRT reports that determining the portion of these LOCs possibly linked to Vesttoo and fraud remains challenging.

The 2022-end Schedule F filings for the US insurance market were the basis for the systematic exploration of CCB LOCs.

Critical exposure to CCB was evident among various industry players, some already reported to have specific ties to Vesttoo-driven reinsurance backed by CCB LOCs.

In a recently published study, ALIRT Insurance Research noted the perplexing reality of how such fraud was able “to outwit various layers of due diligence”. The report underscores that all recipients of the fraudulent LOCs “share some blame for this misfortune”.

The study also outlines US insurer exposure to CCB LOCs, pointing to substantial usage particularly by fronting specialists.

ALIRT stated, “Although we cannot definitively identify the extent of legitimate CCB LOCs, we present a comprehensive picture of CCB LOC exposure in an attempt to illustrate the surplus exposure US insurers can accumulate over time concerning LOCs from a single banking institution.

ALIRT also highlighted the proactive steps taken by several insurers potentially impacted by fraudulent LOCs due to their association with Vesttoo. These insurers are currently in the process of replacing the contentious LOCs with new collateral agreements.”

Notably, among these companies is the Porch Group-owned Homeowners of America Insurance Company (HOA).

As reported earlier, HOA’s owner, Porch, highlighted an LOC collateral problem arising from reinsurance obtained via Vesttoo.

ALIRT states that HOA possesses $300 million of LOCs with CCB – a figure echoed by Porch in its recent results statement.

By the end of 2022, CCB LOCs accounted for approximately 394% of HOA’s policyholders surplus.

Industry front runner Clear Blue Insurance Company held even higher CCB LOCs, amounting to $360.5 million that comprises 335% of policyholder surplus.

It bears repeating that establishing the specifically Vesttoo-facilitated reinsurance-linked portion of these LOCs remains elusive, rendering the fraudulent fraction unassessable. However, HOA implied that its complete $300 million CCB LOCs originated from a Vesttoo-sourced reinsurance agreement.

The use of CCB LOCs discovered by ALIRT seems most prevalent among fronting experts, followed by several insurtech underwriting firms.

As ALIRT pointed out, quantifying the reach and repercussion of this fraud, including the entities impacted, remains an uphill task.

Moreover, most of the potential LOC fraud exposure identified so far is reportedly being replaced with fresh reinsurance agreements, according to firms involved in the process.

It’s essential to once again recall ALIRT’s stance: “While this fraud seems intricately built, it is difficult to comprehend its evasion of diverse layers of due diligence supposedly conducted by these assorted participants. Unless shortcuts were taken in a rush to deposit premium in challenging sectors of a difficult P&C market.”

Worth noting too is that the analysis solely accounts for over $1.3 billion in CCB LOCs.

Further, investigations have named three banks in connection with the possible financing of the fraudulent LOCs backing Vesttoo-driven reinsurance deals. These include Standard Chartered and Santander, implying that the full scope of market exposure might only emerge further into the future.

Finally, this assessment of exposure only considers US insurance carriers using financial filings. Various other insurance and reinsurance markets, including Lloyd’s, also extensively utilize LOCs.

For a comprehensive account of the allegations surrounding fraudulent or forged letter-of-credit (LOC) collateral linked to Vesttoo deals, browse through our coverage.

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