Despite Vesttoo, fraud and capital concerns persist…

Two years ago the CEO of Vesttoo was doing the rounds in Monte Carlo talking up its ambitious plans, fresh from unveiling a $1bn capacity deal to support the US programs space and weeks before attaining unicorn status after an $80mn Series C fundraise.

There is little value in rehashing the story of what happened next, and to fully detail the drama that unfolded and the collapse of the insurtech risk transfer platform would more than fill this issue.

Suffice to say, as the (re)insurance sector was digesting the exposure of a giant fraud amounting to several billions of dollars at last year’s Rendez-Vous, the consensus was that letters of credit would come under much greater scrutiny and that the Vesttoo crisis was a wake-up call for the industry.

There was also a widely held view that such a fraud was in some ways unavoidable and not an indictment of collateralised reinsurance as a product or the use of collateral in general.

Even as litigation has rolled on in the year since and the cost to parties impacted by the Vesttoo fallout has become clearer, that view is still subscribed to by many, and the use of collateralised reinsurance has continued to be a mainstay in segments such as the MGA and programs sector.

At industry conferences, panels of executives have highlighted the lessons they say have been learned from last year’s events, which also included the James Allen bogus capacity affair and Trisura’s reinsurance recoverables mishap.

Greater controls and governance at fronting carriers and MGAs have been highlighted and the speedy efforts of parties to resolve Vesttoo-related issues have been praised.

Meanwhile, the growth of the wider fronting carrier and programs space – which outside of the intellectual property transactions was most impacted by Vesttoo – has continued with gusto.

But some readers with a longer memory may be of the mind that the 2023 mishaps were nothing new and hardly unique – even if the scale of the Vesttoo fraud may have been unprecedented.

There are plenty of historical examples of either outright fraud or capacity that was not quite what it first seemed.

Indeed, this author recalls cutting his teeth in the early days of his insurance journalism career on stories of construction liability insurance being written by unauthorised companies with complicated ownership structures in unusual domiciles and security that shouldn’t have passed broker approval.

Before then, of course, was the Dai Ichi Kyoto reinsurance scandal in the mid-1990s.

These kinds of happenings have periodically been exposed – often around the fringes of the market, in areas where traditional capacity is hard to come by and perhaps buyer scrutiny in the quest for affordable cover is not as stringent as it might be.

And there are a couple of more contemporary tales that are coming to light that suggest concerns about capacity and collateral may not have gone away with Vesttoo.

We report in today’s issue that AM Best-rated Newpoint Re is facing scrutiny of its capital strength, highly complicated web of group companies and the colourful pasts of group executives.

The St Kitts & Nevis reinsurer has been growing fast to become an active player on both sides of the pond, often via fronting companies and program managers. You could say it is specialising in insuring the uninsurable – and has collected hundreds of millions of premiums in the past three years. But an investigation is throwing light on the nature of Newpoint Re’s highly unorthodox capital structure – including, as we reveal in our lead story, that an obscure company in Wyoming has a charge over all of Newpoint Re’s assets.

And this publication has also recently been reporting on the litigation between ILS manager Leadenhall Capital Partners and Miami investment firm 777 Partners.

Leadenhall sued 777 Partners in May seeking “unspecified damages” and alleging the investment firm and its co-founders of fraudulently borrowing against £350mn in assets that “it didn’t own, didn’t exist or were already promised to someone else”.

777 Partners and its leading executives have now asked the US Court for the Southern District of New York to dismiss the lawsuit on jurisdictional grounds. Again, we report in some detail in today’s edition the latest developments.

If nothing else, the developing stories indicate that collateral and capital issues continue to make the news at a time when capacity in certain sectors is ultra-scarce. Heightened vigilance is critical for the sector if it is to avoid the pitfalls of the past and with it reputational damage…