Speaking yesterday, Mac Armstrong, the CEO of Palomar Insurance Holdings, the speciality California-headquartered insurer that offers largely catastrophe exposed property products, disclosed exposure via a single counterparty to the Vesttoo-linked collateral issues, but said this is “immaterial” and could actually constitute an opportunity for his firm.
Discussing the Palomar Front business during an earnings call, where his firm partners with sources of reinsurance capital, insurance carriers and managing general agents (MGAs) to help in the structure and efficiency of customised program insurance business, CEO Armstrong highlighted the connection to the alleged letter of credit (LOC) fraud affecting Vesttoo facilitated collateralized reinsurance deals.
“The goal of our fronting effort is to provide services to a select group of MGAs, carriers and reinsurers, while we can gain experience on the lines of business to further our diversification in the specialty markets,” Armstrong explained.
Going on to say that, “We closely manage the compliance oversight, reinsurance and collateral of our seven fronting partners. This is a focussed and strategic approach. We maintain a risk participation on selected partners with the current maximum participation of 5%.”
Then adding that, “Our approach has allowed us to quickly assess and limit our counterparty exposure to potentially fraudulent letters of credit (LOC) and transactions arranged by Vesttoo.
“Fortunately, our exposure is limited to a single counterparty and is immaterial.”
Later in the earnings call, Armstrong said that the exposure is via a treaty period that has expired, so Palomar is only “looking at just what’s in trust, and what would be our exposure if it goes beyond trust.”
He added that, “If it goes beyond the trust, which we have full control of, that’s where our exposure would be.”
Reiterating, “Again, it’s immaterial. For everything that’s in place right now, Vesttoo, there’s nothing, Vesttoo is not an issue, they’re not a reinsurer.”
But, while the Vesttoo collateral issues are immaterial, in terms of the potential for Palomar’s fronting operation to be exposed via this single counterparty, Armstrong recognises that the potential for a shake-up in the fronting and program business space as a result of the collateral issues could present an opportunity for his firm.
Armstrong commented, “Certainly, with the shakeout of what’s happening in the fronting market broadly with Vesttoo, our exposure is immaterial.
“We were able to get in front of this really quickly, and we understand not just our exposure, but our remedies and those remedies are several.
“I think for us, we continue to look closely at how we manage these programs and how the industry will shake out. Our reinsurance programs for our fronting partners renewed with increased capacity and support and consistent economics in the second quarter.
“We also had one successfully renewed at the first part of the third-quarter, incepting on July 1st.”
Going on to explain that, “For us, it’s probably a net positive for Palomar because, first and foremost, we’re an underwriting organization.
“We’re already seeing program submissions from MGAs that are looking for potentially a new fronting partner.”
As we said in our article yesterday on the MGA space, in relation to issues with collateral LOC fraud in the industry, quality underwriters will always attract capital, and capital will always have an appetite for quality sources of risk.
While a shake-out of sorts may be ahead, in certain parts of the industry, there are plenty of players ready to fill any gaps that emerge.