Software-driven financial services firm Porch Group has revealed exposure to reinsurance contracts arranged via Vesttoo and has thus realised a charge of $48.2 million in its Q2 results.
Porch noted that in Q3, Homeowners of America (HOA), a subsidiary of Porch Group, discovered that Vesttoo, which arranged capital for one of the firm’s reinsurance contracts, faced allegations of fraudulent activity in connection with collateral it provided to HOA and certain other third parties.
“We immediately began investigating the rapidly evolving situation and have been moving quickly to analyze the impact on our business,” Porch said.
The firm continued, “Additionally, we have communicated and met with regulators and other key stakeholders regarding the evolving situation. The agreement with this reinsurer provided partial quota share coverage as well as up to approximately $175 million in a catastrophic event.”
As a result of its findings, and in accordance with the terms of the reinsurance agreement, HOA terminated its reinsurance contract with the reinsurer on August 4, 2023, with an effective date of July 1, 2023.
Following the effective date of the termination, Porch stated HOA seized available liquid collateral in the amount of approximately $47.6 million from a reinsurance trust, of which HOA was the beneficiary.
“We 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,” Porch explained.
In addition, the firm noted 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.
“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,” Porch said.
The firm’s homeowners insurance arm is currently seeking to understand its rights under the letter of credit, Reinsurance News understands.
Concluding its statement on the topic, Porch said, “HOA has already secured supplemental reinsurance coverage in the amount of approximately $42 million and is currently seeking additional supplemental reinsurance coverage (whether from Porch Group’s captive reinsurer, third parties or a combination thereof) in order to maintain adequate coverage in future periods against potential excess losses in the event of a severe weather event, and to satisfy regulatory and rating agency requirements.
“There can be no guarantee or assurance that HOA will be successful in obtaining sufficient supplemental coverage.
“Regardless of whether additional supplemental coverage is obtained, HOA will continue to remain responsible and committed with respect to all claims and claim settlement expenses under its policies, including claims incurred but not yet reported for prior periods and claims and expenses that are no longer subject to the reimbursement rights in favor of HOA under the terminated reinsurance contract.”
