Porch Group announced that its insurance subsidiary Homeowners of America (HOA) has been placed under temporary supervision by Texas regulators.
The announcement comes in the wake of bankruptcy of allegations of fraudulent activity against reinsurer Vesttoo Ltd, which filed for Chapter 11 bankruptcy protection in August.
The supervision order provides the Texas Department of Insurance (TDI) with more visibility and control during uncertain periods and to ensure there are sufficient plans to build capital surplus at the carrier, Porch said on Tuesday announcing the temporary regulatory supervision by the TDI.
“Vesttoo’s alleged fraudulent activity is an unfortunate event for insurance carriers and the reinsurance industry alike,” Matt Ehrlichman, CEO of Porch Group, said in a statement.
“We view TDI’s supervision order as a sensible action for a regulator to take given Vesttoo’s widespread impact on the insurance industry,” Ehrlichman said.
Following the discovery of fraudulent letters of credit used on its platform in August, Israel-based Vesttoo – partially backed by Banco Santander‘s fintech venture capital arm Mouro Capital filed for Chapter 11 bankruptcy protection in a U.S. court which it said will enable it to pursue legal action against those responsible for a fake collateral scandal.
Vesttoo provides insurers with access to so-called insurance-linked securities – an alternative form of reinsurance. These securities may be backed by collateral in the form of letters of credit.
Porch said since terminating a reinsurance agreement connected with Vesttoo on August 4, HOA replaced 84% of the roughly $175 million in reinsurance coverage provided under that contract.
“HOA will require additional capital to restore surplus, primarily driven by the Vesttoo matter, and is discussing its plans with the TDI.,” according to Porch.
Investment banking company Keefe, Bruyette & Woods, Inc. said the development could raise concerns around the reciprocal exchange timeline, which Porch previously said it expected to complete later this year.
“We expect the development to weigh on Porch’s shares until there is more clarity around HOA’s capital position and confidence in Porch’s ability to address the shortfall,” Ryan Tomasello, managing director at KBW, said in a note.
“The supervision order confirms our earlier concerns around the weak capital position of Porch’s HOA following Vesttoo fraud exposure ($48 million provision taken in 2Q) and significant cat losses ($18 million in 2Q).”
Porch had $358 million of unrestricted cash and investments, including $192 million at HOA and $166 million at other Porch businesses and Porch corporate, as of June 30.
Clinton Mora is a reporter for Trending Insurance News. He has previously worked for the Forbes. As a contributor to Trending Insurance News, Clinton covers emerging a wide range of property and casualty insurance related stories.