No comment from Aon on collateral issues, but LOCs seen as important

Executives from broking giant Aon would not be drawn to comment on the market issues around potentially invalid collateral, but President Eric Andersen did say that letters of credit (LOCs), as one of the forms the broker uses to match capital with risk, do bring the kind of capital they need for their clients.

During the Aon second-quarter earnings call just now, one of the analysts present asked the executives about its intellectual property practice and whether they had a view on recent articles in the press.

Of course, this was a reference to the still-developing story that reinsurance collateral sourced via insurtech Vesttoo could be invalid and that certain letters of credit (LOCs) that underpin transactions are fraudulent.

As we reported before, this issue came to light when a cedent had apparently gone to the New York branch of a Chinese bank that provided an LOC and sought to cash it in, but was told by the bank that they had no idea what the cedent was referring to.

Which kicked off an enquiry and Vesttoo was informed, after which its Board started an audit and hired Kroll to assist with that.

This specific cedent is understood to be party to a single intellectual property transaction, that Vesttoo had been involved in.

As a reminder, the ongoing audit is said to have found that multiple letters of credit (LOCs) are involved, all of which appear issued by the same bank, while in an updated statement Vesttoo said it appears that its “procedures were circumvented.”

Some of the insurance business media have reported that there are Aon intellectual property transactions with a link to Vesttoo’s collateral issues.

We reached out to Aon for comment over a week ago, but have not had any statement at this time.

Recall that, it was already known that Aon had been working with Vesttoo on intellectual property insurance-related financing solutions, with the latter helping to bring capital markets capacity to the brokers’ proposition.

More recently, it’s also been reported by the Insider that some of the line sizes on offer to intellectual property transactions were significant at $100 million plus.

So, it’s not surprising the topic was raised at the Aon earnings call today, but the broker’s executives wouldn’t be drawn to comment directly.

The executives noted the high-growth potential for the intellectual property financing and risk transfer segment, while President Aon Andersen said it is still “in its infancy,” as a percent of Aon revenue.

On the question of the recent media coverage of IP deals, Andersen responded, “To your other question about some of the activity in the market, obviously, we’re not going to comment on specific third parties.

“But I would say, as part of our fundamental role matching risk to capital, we work with many parties that bring capital to the marketplace.

“Some of them use letters of credit to backstop the capital, used by the third parties. But it does provide the kind of capital that we need, that the clients need, to gain the reinsurance capital that they’re looking for.

“So, it’s just one of the ways that we match risk and capital together, you know, on behalf of our clients.”

Which suggests LOCs are recognised as an important part of the risk capital offering in the reinsurance market and are likely to remain so, with one of the biggest brokers in the world highlighting the role they can play.

Also read:

July 28th – Corinthian operating under assumption all Vesttoo-sourced LOCs are fraudulent.

July 28th – Clear Blue: Over 50% of Vesttoo-linked reinsurance already replaced.

July 27th – Everest can lean in if opportunities emerge from Vesttoo collateral issue: Williamson.

July 27th – Vesttoo issue shows importance of sound counterparty risk practices: DBRS.

July 27th – Beazley CEO on Vesttoo: We would look to replace cover & recover premium.

July 26th – Clear Blue rating under review with negative implications on Vesttoo issues.

July 25th – Vesttoo: Updated statement says appears “procedures were circumvented”.

July 25th – AM Best to review fronting collateral in light of Vesttoo news.

July 25th – Fronting company Obsidian says Vesttoo exposure “de minimus”.

July 24th – Clear Blue: No material rating impact from Vesttoo issue. Reinsurance may be required.

July 21st – Vesttoo: Multiple LOCs from one bank in focus. Failure of security controls or KYC?

July 20th – MS Transverse: Any exposure to Vesttoo LOC collateral issues “immaterial”.

July 20th – Vesttoo: Collateral damage.

July 19th – Vesttoo: New report claims significant amount of forged LOCs. The question is how?

July 18th – Vesttoo faces fraudulent collateral claim. Confirms investigation, exit of some leaders.