Porch reveals Vesttoo-linked write-off. Believed LOC & bank checks appropriate

Porch Group, a software driven financial services group with a homeowners insurance arm, has revealed exposure to reinsurance contracts arranged via Vesttoo and has realised a charge of $48.2 million in its second-quarter results because of this, while pursuing $300 million of collateral from a letter of credit (LOC).

Porch explained that its Homeowners of America (HOA) subsidiary had used Vesttoo to arrange capital for some of its reinsurance arrangements.

HOA then discovered the allegations of fraudulent activity and potentially invalid letter of credit (LOC) collateral in relation to the reinsurance deals it had undertaken with HOA and others.

Porch then explained that, “We immediately began investigating the rapidly evolving situation and have been moving quickly to analyze the impact on our business. Additionally, we have communicated and met with regulators and other key stakeholders regarding the evolving situation.”

This Vesttoo-linked reinsurance arrangement provided HOA with partial quota share coverage, as well as up to approximately $175 million of reinsurance to cover a catastrophic event.

Porch said that, due to the findings of its own investigation and in accordance with the terms of the reinsurance, it terminated this reinsurance contract on on August 4th 2023, with an effective date of July 1st 2023, adding that had it not been terminated, the contract would have expired on December 31st 2023.

Porch said that “HOA seized available liquid collateral in the amount of approximately $47.6 million from a reinsurance trust,” but noted that it “recognized in the second quarter a charge of $48.2 million in provision for doubtful accounts in the unaudited condensed consolidated statements of operations to reduce the net recorded balance receivable from the reinsurance contract as of June 30, 2023, to equal the $47.6 million collateral we subsequently collected from the trust in the third quarter.”

However, there was more collateral involved, in the form of a letter of credit (LOC) and Porch said that, “HOA is evaluating and intends to pursue all available legal claims and remedies to enforce its rights with respect to the letter of credit required by the reinsurance contract in the amount of $300 million as additional collateral, and to seek recovery of all losses and damages incurred as a result of terminating the reinsurance agreement due to allegations of fraudulent activity by third parties.”

Where this gets particularly interesting though, is when Porch explains that it believed there had been checks on the letter of credit (LOC).

“Although advisors to the issuing bank have alleged the letter of credit is invalid, HOA received the original letter of credit documents from one of the bank’s branches and believed its partners had performed appropriate due diligence on the bank and the letter of credit. HOA is currently seeking to understand its rights under the letter of credit,” the company explained.

Which is yet another source stating that it felt the proper checks had been undertaken and due diligence followed, in relation to the LOCs at issue in this case.

Porch said that its HOA subsidiary has already secured $42 million in supplemental reinsurance coverage and is now seeking additional supplemental reinsurance coverage, from the Porch Group captive reinsurer, third parties or a combination thereof, so it can maintain adequate coverage for losses and rating agency requirements.

The company also notes that “There can be no guarantee or assurance that HOA will be successful in obtaining sufficient supplemental coverage.”

Porch and its Homeowners of America (HOA) subsidiary is just one of the many companies now scrambling to replace reinsurance and evaluate where to claim, or pursue, any remaining collateral that has proven invalid, potentially fraudulent.

It shows the scale of the issue though, in the figures of another $300 million of collateral being pursued, which for a single counterparty is a significant number.

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