AM Best is taking a close look at the collateral of some rated insurers after reports of trouble at Vesttoo, an Israeli start-up that aimed to be the eBay of reinsurance, and which has a Bermuda entity at the centre of its business model.

“Rating actions will be taken as warranted,” the New Jersey-based ratings agency said in a statement.

It noted that the vast majority of US “fronting carriers” it recently examined remain highly exposed to the reinsurance market.

By late Tuesday, it had already made good on its word by putting the ratings of one company, Clear Blue, under review with negative implications.

Vesttoo got into trouble when it was found that some of the collateral used to back transactions on its platform may have been fake.

The insurtech confirmed that it found certain “inaccuracies” related to collateral, while press reports mentioned $4 billion as the amount of collateral that has been brought into question.

Vesttoo said that a third-party audit is being undertaken.

In some press reports, forged letters of credit from Chinese banks were said to be central to the troubles at Vesttoo.

The company has not responded to requests for comment and has stopped speaking with the trade press. The silence has further eroded confidence in the innovative start-up and has started to shake confidence in the industry.

AM Best’s statement and warning come just days after the Bermuda Monetary Authority said it was aware of the situation and monitoring it.

Tel Aviv’s Vesttoo was founded in 2018. It received initial funding from cryptocurrency entrepreneurs and raised $110 million in six funding rounds. Goldman Sachs participated in the most recent round of funding, which valued the company at more than $1 billion, taking Vesttoo above the threshold for being considered a unicorn.

Vesttoo operates as a marketplace for non-catastrophe insurance-based risk transfer and investment. Bermuda is an essential component in the business model, and a recently developed class of insurance licence was used to facilitate the company’s marketplace concept.

Vesttoo Alpha P&C was registered in late 2022 with the BMA as a collateralised insurer, a class introduced by the BMA in 2019. Collateralised insurers must maintain a head office in Bermuda and appoint a resident principal representative.

Vesttoo has offices in New York, London, Dubai, Seoul, Hong Kong, Berlin and Bermuda, and one executive said in an interview that Bermuda was the key to the whole operation.

“In recent days, Vesttoo, an insurtech that connects capital markets participants with (re)insurance risks, has been in the news regarding claims of fraudulent collateral. Although the details and scope of this issue remain unclear, AM Best is monitoring the rapidly evolving situation and reviewing fronting carriers and other insurers that have material amounts of reinsurance counterparty credit risk and reliance on various forms of collateral,” AM Best said in the statement.

“The Vesttoo situation highlights the importance of carefully managing counterparty credit risk such as letters of credit,“ it added.

Hours after issuing the release expressing general caution related to Vesttoo, AM Best issued another statement saying that an insurer’s credit rating had been placed under review with negative implications due to collateral issues. Vesttoo was not mentioned, but the particulars of the announcement closely matched AM Best’s initial warning.

“The ratings of Clear Blue have been placed under review with negative implications given the current uncertainty around Clear Blue’s ability to rely on certain letters of credit, posted to back reinsurance placed by Clear Blue with certain reinsurers. The ratings will remain under review pending continued discussions with Clear Blue's management and their ability to replace certain programmes and/or letters of credit to allow for proper reinsurance credit at the time of financial statement filings,” the announcement said.

“Although AM Best recognises the uncertainty that still exists to the validity of the letters of credit in question, and Clear Blue is aggressively looking to address concerns, there is execution and timing risk associated with this process,” it added.

In 2022, Vesttoo agreed to supply up to $1 billion of capital-markets sourced reinsurance capacity to Clear Blue, which is based in Charlotte, North Carolina and Guaynabo, Puerto Rico. The company has acknowledged exposure to Vesttoo and has sought to reassure the market.

AM Best said in a report that 100 per cent of Clear Blue’s premiums have been ceded to reinsurers.