Fallout from the bankruptcy of reinsurer Vesttoo Ltd. in the wake of fraud allegations are rippling through the insurance industry, with Porch Group announcing Tuesday that its insurance subsidiary, Homeowners of America Insurance Company, has been placed under temporary supervision by Texas regulators.
Porch CEO Matt Ehrlichman called the move by the Texas Department of Insurance, “a sensible action for a regulator to take given Vesttoo’s widespread impact on the insurance industry.”
Porch said that since terminating a reinsurance agreement connected with Vesttoo on Aug. 4, Homeowners of America Insurance Company (HOA) has replaced 84 percent of the roughly $175 million in reinsurance coverage provided under that contract.
HOA continues to manage its day-to-day operations, including the writing of new business, renewals and payments of claims, but will remain subject to supervision by the Texas Department of Insurance (TDI) “until the TDI is sufficiently comfortable with HOA’s operations and financial position post-Vesttoo,” Porch said.
Vesttoo claims it’s employing artificial intelligence to modernize the reinsurance industry, a business that helps insurers transfer some of the risk posed by policy claims to investors.
But Vesttoo filed for Chapter 11 bankruptcy protection on Aug. 14 — five days after the Wall Street Journal reported that the Federal Bureau of Investigation and several state insurance commissioners were investigating whether the Tel Aviv-based firm served as a conduit for a multibillion-dollar fraudulent scheme involving faked letters of credit.
Former Vesttoo CEO Yaniv Bertele took to WhatsApp on Monday protesting that he and his co-founder, Chief Financial Engineer Alon Lifshitz, had no knowledge of any fraudulent practices at the company, industry trade publication The Insurer reported.
“First and foremost, Alon (Lifshitz) and I, both individually and collectively, were entirely unaware of any document falsification in transactions and we certainly didn’t fake any documents,” Bertele wrote. “We did not engage in deception, theft, or any of the actions attributed to us!”
Porch, a moving and home improvement marketplace, disclosed in its Aug. 9 quarterly earnings report that Vesttoo had arranged capital for one of HOA’s reinsurance contracts that provided up to $175 million of catastrophic event coverage.
“We immediately began investigating the rapidly evolving situation and have been moving quickly to analyze the impact on our business,” Porch disclosed to investors at the time. “Additionally, we have communicated and met with regulators and other key stakeholders regarding the evolving situation.
After terminating the reinsurance contract, HOA said it was able to seize $47.6 million in collateral from a reinsurance trust, but also recognized a $48.2 million charge “in provision for doubtful accounts” after learning that a letter of credit arranged by Vesttoo was invalid.
The charge contributed to an $87 million Q2 net loss, up from a $27.3 million loss during the same quarter a year ago, even as revenue grew by 39 percent to $98.7 million.
HOA is a licensed property and casualty insurance carrier operating in 21 states, with most of its business conducted in Texas, South Carolina, North Carolina, Georgia, Virginia and Arizona.
Porch said Tuesday HOA continues to obtain additional capital and reinsurance to satisfy regulators with the Texas Department of Insurance. Porch said it held $358 million of unrestricted cash and investments as of June 30, including $192 million at HOA and $166 million in other Porch businesses and corporate.
“Vesttoo’s alleged fraudulent activity is an unfortunate event for insurance carriers and the reinsurance industry alike,” Ehrlichman said in a statement. “That said, it is a one-time event that the Porch team has quickly reacted to and has done an excellent job of securing supplemental reinsurance coverage. HOA has historically produced strong results, and we look forward to working with the TDI and providing clarity on HOA’s plans for continued strength moving forward.”
Porch, which went public in a 2020 special purpose acquisition company (SPAC) merger, provides software and services to more than 30,000 home service providers including home inspectors, mortgage brokers, title companies and moving companies.
The company says it can simplify moving and closing by providing services including homeowners insurance and warranties, and an app aimed at helping consumers shop for home repair and improvement services, security, and internet.