Clear Blue rating under review with negative implications on Vesttoo issues

Fronting specialist Clear Blue Insurance Insurance Group has had its A- financial strength rating placed under review with negative implications by AM Best as the fall-out from the Vesttoo collateral issues continues.

But the fronting company said that it believes it can replace all of the Vesttoo linked reinsurance collateral and it continues to expect no negative impacts to Clear Blue or its customers.

AM Best said yesterday that it will review the collateral arrangements of all fronting companies that it provides ratings for, in light of the claims that collateral involved in transactions facilitated by Vesttoo could be fraudulent.

It followed this with a specific update on Clear Blue, as the fronting company likely most exposed to the Vesttoo situation.

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 into a partnership back 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.

AM Best said that is has placed Clear Blue Insurance Group’s Financial Strength Rating (FSR) of A- (Excellent) and the Long-Term Issuer Credit Ratings (Long-Term ICR) of “a-” (Excellent) under review with negative implications as of yesterday.

The rating agency explained, “The ratings of Clear Blue have been placed under review with negative implications given the current uncertainty around Clear Blue’s ability to rely on certain letters of credit, posted to back reinsurance placed by Clear Blue with certain reinsurers.

“The ratings will remain under review pending continued discussions with Clear Blue’s management and their ability to replace certain programs and/or letters of credit to allow for proper reinsurance credit at the time of financial statement filings.”

AM Best noted that Clear Blue retains premiums which remain available to pay claims associated with any programs that had Vesttoo-linked collateral exposure.

Clear Blue had previously highlighted this fact, while stating that it does not expect a material impact to its ratings from the ramification of issues at Vesttoo, but may seek out more reinsurance to protect its surplus and capital.

AM Best said it recognises “the uncertainty that still exists to the validity of the letters of credit in question.”

Adding that it knows “Clear Blue is aggressively looking to address concerns,” but saying that in doing so there is “execution and timing risk” associated with the process.

As a result, AM Best said that, “Placing the ratings under review will allow AM Best to continue its discussions with Clear Blue’s management to determine the effectiveness of management initiatives in mitigating any potential impact to Clear Blue through additional reinsurer participation or protection of the balance sheet.”

Clear Blue responded to AM Best’s action, acknowledging the placement of its ratings under review with negative implications, saying, “Clear Blue continues to operate as usual and remains singularly focused on investigating and resolving this matter swiftly and in the best interests of our policyholders, partners, and all other stakeholders.”

Noting that the ratings will remain under review while the process to “replace certain programs and/or letters of credit to allow for proper reinsurance credit at the time of financial statement filings,” is ongoing, Clear Blue noted it remains confident in solving these challenges.

“Clear Blue management is highly confident in our ability to meet these requirements, continue to pay claims, replace Vesttoo reinsurance and collateral within a reasonable period, and maintain Clear Blue’s strong capital position and growth,” the company said.

Going on to reiterate that retained premiums are “more than sufficient to pay all claims on the affected programs,” while Clear Blue continues to work with the market to “relocate and replace the Vesttoo reinsurance as quickly as feasible.”

“We look forward to working with AM Best to provide detailed updates on our progress and insight into our reinsurance, capital and risk structures in order to ensure the resolution and removal of the review status as soon as possible,” Clear Blue said.

At this stage there is still no visibility of the true scale of the issues with collateral linked to Vesttoo facilitated transactions, with leaks and rumours suggesting something in the billions of dollars.

Out of that, we also have no visibility of how much of the affected reinsurance collateral might have been linked to Clear Blue.

But, as the fronting specialist with perhaps the deepest relationship with Vesttoo, it seems likely to be a reasonable amount and AM Best taking this rating review action also suggests it is a significant enough number to concern the rating agency enough to get involved in this way.

It also appears likely Clear Blue and others like it will seek to distance themselves from Vesttoo linked collateral at this time, so even where collateral is proven not to be fraudulent we could see efforts to shift to other reinsurance providers as well, making the task bigger than were it just undertaken for the letters of credit (LOCs) that prove fraudulent.

Until clarity emerges from the audit process at Vesttoo and the market understands the extent of the fraud or forged LOC issue, the only way companies can really respond is to shut off their exposure to collateral provided via Vesttoo transactions and investors.

Also read:

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.