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Program Manager in Full: Clear Blue passes the Vesttoo test

When Clear Blue relaunched its recap process with Piper Sandler back in the early summer, few could have predicted what was to unfold in the coming weeks and months...

As the Vesttoo fraudulent letters of credit (LOC) allegations rocked the fronting, MGA and reinsurance sectors, Clear Blue could have been called the scandal’s ‘ground zero’, at least in terms of potential impact.

For one thing, the fast-growing fronting carrier was already linked to the Israeli ILS insurtech through a landmark $1bn capacity commitment entered in August 2022 to support Clear Blue’s continued growth trajectory.

Although this $1bn wasn’t deployed in full, it was subsequently revealed that the insurer was provided with over $560mn of fake LOCs that had supposedly been issued by China Construction Bank and Standard Chartered Bank.

The collateral fraud – the brazenness of which has at times stretched credulity – has been analysed at length, as has the trail of problems it left across the sector as counterparties became aware of its extent.

For Clear Blue, the revelations prompted an immediate scramble to replace capacity, and to reassure counterparties that the impact on its own balance sheet was manageable, and that the policies which it had fronted for with Vesttoo backing would stand.

The challenges facing the fronting carrier were reflected in AM Best’s move on 25 July to place its crucial A- financial strength rating under review with negative implications.

Clear Blue had already made it very clear that it had withheld or put in trust the majority of premium related to Vesttoo-backed deals, stating that those premiums would be “more than sufficient” to pay claims.

It also sought to reassure that it did not expect a material impact to its AM Best rating, or hits to its business or policyholders.

The company said it was “singularly focused” on investigating and swiftly resolving the Vesttoo-related collateral concerns.

High-wire balancing act

The following months, however, saw Clear Blue in a high-wire balancing act to replace capacity and maintain relationships while providing the necessary level of confidence to its various counterparts that it would be able to complete the process in time – as well as plug any holes in its balance sheet to hold on to the critical A- rating.

All of this came against a backdrop of frenzied market speculation about the scale of the problem and the sector’s history of death spirals, whereby the fate of crisis-struck insurers and their ratings can sometimes become an irreversible self-fulfilling prophecy.

However, AM Best’s confirmed this week that Clear Blue’s actions to replace all reinsurance on its go-forward book and inject $25mn into capital surplus – along with steps to improve processes around LOCs – were sufficient to remove the review and affirm the financial strength and credit ratings with a stable outlook.

Breslin and his team have always expressed confidence in their ability to see the crisis out and retain their rating.

But to turn words into actions, and then to carry it off, is a feat worthy of some praise.

Breslin was quick to thank his colleagues, who he said had worked nonstop to remediate the situation, as well as the “loyal” MGA, reinsurer and broker partners who supported Clear Blue’s efforts throughout.

Although some might argue that the type of fraud perpetrated in the Vestoo case could be virtually impossible be detect, Clear Blue will have no doubt learned some lessons from this debacle – most notably in relation to processes around LOCs and collateral, and also counterparty diligence.

There has also been a financial cost – and attention may now turn to where the company looks if it seeks to recover its losses and the capital infusion it was forced to make.

In the meantime, against the expectations of some, Clear Blue will enter 2024 with its rating intact, as it returns to its growth path and a possible resumption of its paused recap plans…


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