Bank at centre of Vesttoo scandal rapidly increased LOC issuances in 2022

China Construction Bank issued $1.28 billion worth of reinsurance collateral letters of credit in 2022, up from just $77 million a year earlier.

The bank, which was drawn into the Vesttoo scandal when fraudulent letters of credit from the bank were presented as collateral, moved into the top 15 issuers as a result, according to a report from ratings agency AM Best.

AM Best, which issued the report in the wake of the Vesttoo scandal, said it highlighted the importance of managing counterparty risk.

“Cedents should conduct appropriate due diligence on counterparties and contracts, as well as collateral reviews, which we discussed earlier this year in Hybrid Model Provides Opportunities for Fronting Carriers,” Best said.

Best said it is continuing to monitor the evolving situation and reviewing its rated fronting carriers, as well as other insurers that have material amounts of reinsurance counterparty credit risk and reliance on various forms of collateral. Based on this review, rating actions will be taken as warranted, it said.

Best said it could not identify which bank LOCs were related directly to Vesttoo transactions, but said a broad analysis showed that LOCs against business with unaffiliated reinsurers accounted for 22% of total collateral held.

It noted Citibank was the largest issuer of LOCS used for collateral, with 19% in 2022.

“In 2022, insurers have added new banks to their roster of LOC providers,” Best said. “Two banks (Kokmin Bank and Lake Forest and Trust Co) account for the vast majority of new LOCs; six insurers posted LOCs as collateral from those two banks. Insurers have exposures to some newly issuing banks, but the growth in LOCs by other banks has also been notable.”

AM Best said that of banks that doubled their LOC issuance between 2021 and 2022, China Construction Bank saw the largest monetary increase. French investment bank Natixis was next with an increase from $31 million to $332 million while Bank of China increased from $111 million to $242 million.

Among companies with the biggest LOC exposure to China Construction Bank, Clear Blue Insurance had $360 million, Homeowners of America had $300 million, Clear Blue Specialty had $164 million and Trisura had $51 million.

AM Best has placed Clear Blue’s A- rating under review as a result of its exposure to Vesttoo. Porch Group, the owners of Homeowners of America, has recognised a $48.2 million second-quarter charge and terminated a $175 million reinsurance contract linked with Vesttoo.