Clear Blue: No material rating impact from Vesttoo issue. Reinsurance may be required

Program fronting specialist Clear Blue Insurance Group has stated that while it does not expect a material impact to its ratings from the ramification of issues at Vesttoo, the company may seek out more reinsurance to protect its surplus and capital.

Clear Blue is seen as perhaps the most-exposed fronting company to programs that involved reinsurance capital from under-fire insurtech Vesttoo.

With multiple letters of credit (LOCs) backing Vesttoo reinsurance participations in programs now thought to be fraudulent or forged, there is a risk for fronting specialists that capacity is not there to support the functioning of client programs.

Clear Blue and Vesttoo had entered a partnership in August 2022, where the insurtech had been planning to deploy much as $1 billion of capacity from the capital markets through Clear Blue’s property and casualty (P&C) programs over the next year.

While we can’t be certain how far along towards that target the pair were, it’s safe to assume a relatively significant amount of Vesttoo linked collateral was sitting behind Clear Blue’s programs by the time the collateral issues at the former have emerged.

Clear Blue has now issued a statement, in which the fronting firm said it is “aware of the allegations that letters of credit issued by the China Construction Bank for reinsurance collateral, on behalf of Vesttoo, are fraudulent,” saying that its insurance carriers “have utilized Vesttoo for reinsurance capacity on certain of our programs in the last 18 months.”

The fronting specialist said it has strong risk management controls in place, to protect its claims paying ability and financial strength.

One piece of that is the retention of client premiums, against programs written and the firm said that for all programs that were backed by reinsurance from Vesttoo and that featured China Construction Bank-backed reinsurance collateral, it has retained premiums and these are either directly withheld or retained in trust accounts that are fully accessible by Clear Blue.

Clear Blue said that “That premium, which we remain in possession of today, is more than sufficient to pay all claims on those programs.”

The fronting company said that “Clear Blue’s risk management processes have protected its claims paying ability,” regardless of whether Vesttoo’s collateral has integrity or not.

Adding, “Clear Blue will continue to collect all premium going forward for those Vesttoo/China Construction Bank transactions. We do not expect a material impact to our AM Best rating or any other negative consequences to our business or our policyholders.”

The company continued, “Clear Blue is diligently investigating the facts, communicating with all stakeholders, and developing action plans. We have retained outside counsel to conduct a comprehensive and thorough investigation into the matter, and we will remain singularly focused on achieving a complete resolution of this issue in a timely manner.

“In the normal course, we may seek additional reinsurance to protect our policyholder capital/surplus, but in the meantime, we want to emphasize that Clear Blue is and will continue to operate in a “business-as-usual” environment.

“Clear Blue will not be accepting Vesttoo as reinsurance capacity on new or renewal programs going forward.”

We understand that the sales process that Clear Blue had been undertaking in recent weeks has now been shelved for the moment, while the fall-out of the Vesttoo collateral issue develops.

Replacement collateral is now going to be sought by companies exposed to the developing Vesttoo collateral crisis, with fronting specialists needing to replace reinsurance that sits behind affected slices of programs.

Our sources said that securing that replacement reinsurance may now prove a more onerous and costly task, than it was securing the reinsurance from Vesttoo in the first place, with the market holding all the cards on price and terms and this whole issue seen as yet another stimulus for hard market conditions to persist.

Also read:

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.