Current economics do not favour sidecars, says A.M. Best

RenaissanceRe Holdings Ltd. may have just launched a US$60-million sidecar, but don’t take that as a sign that sidecars are coming back into vogue, A.M. BestWeek reports.
In the June 15, 2009 issue of BestWeek U.S./Canada, 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 the subsequent hurricanes Rita, Wilma and Katrina. 
“The economics of capital aren’t compelling enough to draw the capital in [to create sidecars],” he said. “That could change if there’s another major event. If prices were to go up by 20% to 30%, you might see people loosening their purse strings.”
Sidecars, as BestWeek notes, are “limited-purpose companies funded by investors, often hedge funds, to purchase insurance policies from an insurer.”
Last year saw little sidecar movement, BestWeek says.
In 2008, XL Re entered into a quota share reinsurance treaty with Cyrus Reinsurance II, which was capitalized with US$136 million.
Just a few new sidecars were formed in 2007, including RenRe’s Starbound Re II and Marsh Risk Innovations, a US$400-million facility created by Marsh and Ace Ltd. to provide capacity for the property catastrophe market.
RenRe’s US$375-million Starbound venture in June 2007 provided capacity for the Florida homeowners’ market.
By way of comparison, about 20 sidecars, carrying a combined capacity of US$4.5 billion, formed in 2006 after Hurricanes Katrina, Wilma and Rita.
“After the capacity crunch in the market subsided, there was less demand for the temporary vehicles,” BestWeek says.