December 2024 – SALLYPHOCAYATE

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The catastrophe bond and insurance-linked securities (ILS) market is expected to see healthy demand from investors in 2025, but the firmness and trajectory of pricing in the sector, and more broadly in reinsurance, remains less certain, according to Mark Gibson of Schroders Capital.

With investors in cat bond and private ILS funds now looking set set for another year of attractive returns for full-year 2024, we spoke with Gibson, the Head of Products and Solutions Insurance Linked Securities at Schroders Capital, to explore the outlook for 2025 and get his views on the market drivers for the coming year.

Commenting on how 2024 has gone, Gibson explained that, “From a Schroders Capital point of view, the ILS market in 2024 YTD has been characterised by continuing attractive yields on a relative basis, coupled with limited impacts from wider wind and weather events.

“Yields benefited both from collateral return and still-attractive spread multiples, although the latter have seen some tightening as capital has flowed into the market.”

He went on to explain that, “From a risk perspective, our focus in recent years has been to move to a more remote attachment level, with a heavier weighting to occurrence than to aggregate trigger mechanisms. As a result, whilst 2024 was another above-average year for wind and weather-related losses, there was minimal impact on our portfolios.”

Looking ahead to 2025, Gibson is expecting another period of healthy demand for catastrophe bonds and private ILS, but feels that there is currently no clear picture on the outlook for pricing.

“It is difficult to provide a detailed outlook for 2025 given the large number of variables, some of which are beyond our control and could have a major impact, such as the occurrence of one or more large events. But we can make some general observations on broader market dynamics and how these could drive demand and pricing trends,” Gibson told us.

Going on to explain that, “The catastrophe bond market appears to be more in equilibrium than it was going into 2024. A large volume of maturities in the next three or four months, combined with retained earnings and inflows to managers, will result in healthy demand for paper. The primary pipeline appears to be fairly full and there has been some useful issuance on behalf of both new and repeat sponsors during Q4.

“However, it is not yet clear if the issuance already seen, and the volume of issuance anticipated during Q1 2025, will be greater than the available capital. If available capital exceeds primary issuance volume, then we may witness further spread tightening in addition to what we have seen during Q4 2024.

“On the other hand, if the pipeline is larger, and flows for longer, then spread levels may be a little firmer in Q1 than they are now.”

Schroders Capital also sources and allocates capital to opportunities in the private reinsurance market and here too Gibson feels there are potential capital pressures that may weigh on pricing dynamics.

Gibson said, “The private ILS market is even more closely reflective of what is going on in the traditional reinsurance market than is the catastrophe bond market. Whilst we have seen statements made by senior members of some large reinsurers in support of market discipline, meaning that there is not anticipated to be a reduction in pricing or a loosening in terms and conditions, increased capitalisation of the reinsurance industry as a result of retained earnings may lead to increased competition.

“During the current renewal season it seems that there is a limited amount of downward pressure on pricing, even for so-called peak perils, and a return to aggregate and other structures that respond to frequency, rather than just severity, of losses.”

Concluding that, “It is possible that protection buyers will respond to the more attractive terms and conditions by increasing the amount of protection that they buy.

“This could lead to an increase in the size of the ILS market, both public and private, and a more stable pricing environment. At the moment it is still too early to tell if this scenario will materialise.”

Read all of our interviews with ILS market and reinsurance sector professionals here.

Healthy ILS demand expected in 2025, but pricing less certain: Gibson, Schroders Capital was published by: www.Artemis.bm
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You would be forgiven for thinking the industry had moved on from the debacle that was the Vesttoo reinsurance letter of credit (LOC) fraud, but legal action continues and the latest case to be filed sees fronting specialist Clear Blue Insurance suing China Construction Bank for damages.

Recall that, China Construction Bank was the financial entity that purportedly issued billions of dollars of letters of credit (LOC) that were used to collalteralize reinsurance agreements in transactions involving Israeli insurtech Vesttoo.

More traditional reinsurance than ILS, these agreements turned out to be supported by thin air, as the letters of credit (LOCs) turned out to be forged and as the bankruptcy of Vesttoo moved forward, details emerged of a relatively unsophisticated web of fraud, with international tentacles reaching to the Chinese state supported bank.

Fronting specialist Clear Blue was caught up as the provider of fronting paper to numerous deals where Vesttoo had sourced and posted the collateral, which turned out to be fake LOCs, resulting in financial losses for the company.

The company has been involved in Vesttoo’s bankruptcy as a creditor, but recoveries through that avenue are expected to have been minimal and Clear Blue has also launched a lawsuit against broking giant Aon.

Clear Blue’s focus has now turned to the bank that was deeply linked to the fraud that occurred.

Recall that, in total, almost $3.36 billion of standby letters of credit (LOC) are presumed to have been fraudulently created under the Vesttoo scheme and of that amount, figures Artemis had seen towards the end of 2023 suggested that at least $2.81 billion of these were linked to China Construction Bank.

In addition, emails that emerged during Vesttoo’s bankruptcy case showed that a China Construction Bank (CCB) employee, Chun-Yin Lam, used an official bank email address to communicate with some of the Vesttoo employees that had been accused of perpetrating the fraud.

While this CCB employee, Lam, was also said to have identified the Chinese investor implicated in the fraud, Yu Po Holdings, as a client of the bank. Yu Po Holdings was the name of the primary investor in reinsurance transactions involving fraudulent LOCs issued by CCB for Vesttoo reinsurance deals. Questions remain over whether Yu Po actually exists as an investor, or was merely a shell used for the fraud. Most believe the latter is the more likely.

So Clear Blue has turned its attention to China Construction Bank as it seeks to recover some of the damages it has suffered through the Vesttoo debacle.

In a New York lawsuit filed this week, Clear Blue, through its underwriting entities, demands a jury trial hearing for its complaint.

Clear Blue’s complaint states, “CCB, operating through its authorized agents, participated in and allowed a multi-billion-dollar fraud to be perpetrated upon an entire segment of the reinsurance industry in the United States by fraudulently refusing to honor dozens of letters of credit issued by CCB as collateral for reinsurance transactions. These letters of credit were issued on CCB’s letterheads, bore CCB’s SWIFT codes, signatures and official seals and were provided by CCB’s authorized employees with valid CCB credentials, who were using CCB’s offices, CCB’s emails and CCB’s telephone numbers to negotiate, issue, deliver and confirm these letters of credit. They were also vetted by some of the biggest reinsurance brokers in the world and were repeatedly confirmed by CCB’s employees.”

Clear Blue states that CCB participated in the reinsurance deals “as part of its targeted expansion in the
United States,” citing $890 million of LOCs from CCB that were supposed to have backed reinsurance deals.

The fact CCB refused to acknowledge having issued the LOCs, when the plaintiff tried to present one for payment to support claims, Clear Blue’s complaint states, “This is a complete ruse by CCB and an attempt to fabricate an excuse for its blatant breach of the LOCs, which were negotiated and issued by its authorized agents who had full authority to contractually bind CCB.”

CCB’s actions caused “shockwaves throughout the entire insurance and reinsurance industry in the United States and
resulting in billions of dollars in actual and reputational damages.”

Clear Blue also states that CCB’s New York, Asia and parent corporation were all acting in concert, so are jointly liable and summons have been issued for each to respond to the court complaint that has been filed this week.

China Construction Bank has also been sued by numerous other insurance and reinsurance market entities, including broker Aon, as well as Porch Group’s Homeowners of America Insurance Company (HOA), and also Incline P&C Group.

The lawsuit filed by Clear Blue goes into a lot of detail about how the implicated CCB employee (LAM) responded to an attempted claim, delaying payments by saying CCB was new to provision of reinsurance LOCs, but eventually Vesttoo fronted a payment to cover the funds itself.

Which appears to be one way the insurtech was covering up the fraud, by facilitating payments when necessary by using other funds, rather than having the forged LOCs called on.

But Clear Blue then sought confirmation that LOCs were valid and still in-force, only to be told by an employee of CCB’s New York branch that the LOC in question had never been issued by the bank.

After that, Clear Blue was told all the LOCs purportedly issued by CCB were fraudulent.

Clear Blue claims that either, CCB is bound by the LOCs, or CCB participated in the scheme to defraud the company.

With this additional lawsuit, the pressure on China Construction Bank continues to build. However, there are no guarantees the action makes progress at any pace, as we’ve seen with the other legal action related to the Vesttoo fraud.

Clear Blue is doing its best to recover some of the damages it has faced due to being caught up by the fraud scheme, having resulted in significant costs for the company as it was forced to respond and take action to protect its business.

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

Clear Blue sues China Construction Bank over Vesttoo reinsurance fraud was published by: www.Artemis.bm
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