A.M. Best: Sidecars Unlikely to Make Strong Comeback This Year

Meg Green

PEMBROKE, Bermuda

 

RenaissanceRe Holdings Ltd.'s launch of a $60 million sidecar isn't a sign that sidecars are coming back into vogue -- at least not yet, A.M. Best analysts said.

Investors capitalized the sidecar, Timicuan Reinsurance II Ltd., with $60 million in equity capital, including $10 million from RenRe itself. RenRe has agreed to cede a defined portion of its 2009 Florida hurricane risk portfolio to Tim Re II under a fully collateralized reinsurance agreement (BestWire, June 1, 2009). It's the first new sidecar to be launched since January 2008.

Robert DeRose, a vice president at A.M. Best, said the market is hardening, but not as severely as it did after Sept. 11, 2001, and after hurricanes Katrina, Rita and Wilma. "The economics of capital aren't compelling enough to draw the capital in. That could change if there's another major event. If prices were to go up by 20% to 30%, you might see people loosen their purse strings," DeRose said.

Peter Dickey, an assistant vice president at A.M. Best, said: "It's a good sign [that RenRe has launched a sidecar] but it's too small to really attract any attention." He said the investors were wise to pick RenRe as their partner for the sidecar. "RenRe has been doing this for years. It has an excellent reputation for doing this," Dickey said.

Sidecars are limited-purpose companies funded by investors, often hedge funds, to purchase insurance policies from an insurer. It's a way for an insurer to share risk, and if the policies have low claim rates, investors will make higher returns. With the reinsurer offering its underwriting engine, sidecars also allow investors to enter the insurance market without having to directly take on underwriting.

About 20 sidecars carrying a combined $4.5 billion in initial capacity were launched in 2006 ? in the wake of Katrina, Rita and Wilma, according to A.M. Best's Review & Preview 2007. After the capacity crunch in the market subsided, there was less demand for the temporary vehicles.

Just a few new sidecars were formed in 2007, including RenRe's Starbound Re II and Marsh Risk Innovations, a $400 million facility created by broker Marsh and insurer Ace Ltd. to provide capacity for the property catastrophe market.

When RenRe launched Starbound in June 2007, it said it brought $375 million in new reinsurance capacity for the Florida homeowners market.

Last year saw little sidecar movement. XL Re entered into a quota share reinsurance treaty with Cyrus Reinsurance II, which was capitalized with $136 million (BestWire, Jan. 8, 2008).

Renaissance Reinsurance Ltd. currently has a Best's Financial Strength Rating of A+ (Superior).

The stock of RenRe (NYSE: RNR) was trading at $47.15 a share on the morning of June 2, up 1.27% from the previous close.

(By Meg Green, senior associate editor, BestWeek: Meg.Green@ambest.com)

Copyright (C) 2009 by A. M. Best Company, Inc.