Benfield: Reinsurance sidecars headed in different direction?

Sidecars remain a popular form of raising capital, but a recent Benfield report suggests sidecars could conceivably be headed in a different direction in the future.
Reinsurers will typically set up a short-term entity called a sidecar, funded by investors money, as a way to raise capital in anticipation of paying for catastrophic losses.
The latest issue of Benfields Bermuda Quarterly, which analyses key Bermudian full-year 2006 capital returns, says more than US$3 billion of equity and loan capital was raised in 2006 to finance Bermudian sidecars.
While most were formed to support North American catastrophe risk, other risks were encompassed, Benfield notes. Motives were essentially either defensive, with relief from high risk capital charges helping sponsors to protect market share, or offensive whereby companies sought to expand capacity to exploit short term opportunities.
But as these opportunities recede, Benfield notes, the future of sidecars will be watched closely as market conditions become more challenging.
Some sidecars may decide not to renew their facilities as capacity intended for the Florida market flows elsewhere, the Benfield researchers note in a press release announcing the report. Reflecting this, the report highlighted Endurance Specialty Holdings Ltds comments in a conference call in early February that sidecars were established with the notion that they would be folded up when opportunities waned and that this was likely to happen given the identity of their investors.
Nevertheless, the report continued, Endurance was not betting the ranch on such an eventuality.