ALIRT finds $1.3bn+ China Construction Bank LOCs in hunt for Vesttoo exposure

In analysing US insurer filings for their use of letters of credit (LOCs) specifically from one of the banks at the centre of the Vesttoo linked collateral fraud story, ALIRT Insurance Research found more than $1.3 billion of them, but said it is hard to tell how much of that is associated with Vesttoo, or potentially fraudulent.

The search for China Construction Bank (CCB) letters of credit (LOCs) was undertaken through end of year 2022 Schedule F filings for the US insurance market.

It shows a significant exposure to the bank for a number of players, some of which have already been reported as with specific links to Vesttoo facilitated collateralized reinsurance backed by CCB LOCs.

As we reported yesterday, ALIRT Insurance Research noted in a report that, it’s “difficult to fathom” that the fraud was “able to evade multiple levels of due diligence”, and that “all of the parties exposed to the recent fraudulent LOC’s… bear some responsibility for this mishap.”

The report also analyses the US insurer exposure to CCB letters of credit (LOCs), finding a significant use by some, especially fronting specialists.

ALIRT commented, “While it is impossible for us to determine how much of these CCB LOCs are legitimate, we provide here a “sweep” of all CCB LOC exposure, if only to show how U.S insurers can build up surplus exposure to the LOCs of a single banking organization over time.

“We note that a number of these insurers with ties to Vesttoo (and thus potentially fraudulent LOCs) have already proactively sought to replace the LOCs in question with new collateral agreements and these efforts are on-going.”

Notably, Homeowners of America Insurance Company (HOA), owned by insurtech Porch Group, is one of them.

As we reported earlier this week, HOA owner Porch cited an LOC collateral issue linked to reinsurance sourced through Vesttoo.

ALIRT found that HOA has $300 million of LOCs with the China Construction Bank (CCB), which is the amount it referenced in the Porch results statement this week.

CCB LOCs represented some 394% of the HOA policyholders surplus at the end of 2022.

Fronting specialist Clear Blue Insurance Company had more at $360.5 million in CCB LOCs at year-end 2022, making up 335% of policyholder surplus.

American Millenium Insurance Company, a Citadel Re affiliate holding commercial auto liability exposure, was next at 304% of surplus, but only $25.6 million of CCB LOC exposure.

It’s important to state again, there is no way of knowing how much of these LOCs are linked to Vesttoo facilitated reinsurance deals, and so how many could be fraudulent, except perhaps in the case of HOA which seemed to imply the full $300 million of CCB LOCs was sourced via a Vesttoo reinsurance arrangement.

Fronting specialists seem to dominate the CCB LOC use that ALIRT has found, after which there are a number of insurtech underwriting companies.

As ALIRT said though, it’s still impossible to estimate the extent of this fraud, how far it reaches and who is affected.

Also, most of the exposure to potentially fraudulent LOCs from CCB that we do know about, is actively being replaced through fresh reinsurance arrangements, it’s been reported by firms involved.

It’s worth repeating AlIRT’s quote here, “While we concede that this was likely a well-designed fraud, it is difficult to fathom that it was able to evade multiple levels of due diligence purportedly carried out by these different participants. That is, unless corners were being cut in the race to place premium into difficult corners of a difficult P&C market.”

It’s also worth considering that this is only an analysis of China Construction Bank LOCs, totalling the just over $1.3 billion.

But, as we now know, there are said to be three banks that have alleged connections to fraudulent letters of credit (LOC) backing reinsurance deals facilitated by Vesttoo, Standard Chartered and Santander being two others, so the true market exposure seems likely to take much longer to deduce.

Finally, this is only an analysis of US insurers through filings, when LOCs are very widely used in other insurance and reinsurance markets, including Lloyd’s.

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