Side-cars offer diversification and capital benefits
The trend of insurers and reinsurers offering alternative forms of capacity to the market through the use of structures such as side-cars is as much about carriers seeking diversification and better uses of their capital as it is about seeking short-term returns for investors.
A number of carriers have launched such vehicles in the London Market of late. Montpelier Re is just one of several Bermuda-based companies to reportedly form new third party fund managers and side-cars in London while Lancashire Holdings will shortly launch Saltire Re I Limited, a fully collateralised Bermuda incorporated special purpose insurer with capacity of up to $250 million.
Stuart Shipperlee, partner at insurance consultancy Litmus Analysis, says that many of the companies forming such vehicles already have experience in the areas of business the side-cars will specialise in. But their formation offers many positives in terms of their ability to optimise their balance sheets and participate on risks they might not otherwise have seen.
“In the case of Lancashire, I don’t think this is really any form of strategic shift for them. Sidecars are really just part of the wider story of carriers looking to optimise the balance between risk, diversification and their cost of capital,” Shipperlee says.
“Having greater capacity through a side-car can allow them to access business that either they might not previously have seen at all, and/or write it at better rates. Obviously this can be an opportunistic reaction to short-term cycle movements but it is also part of a long-term trend to bring different types of capacity to the market and reduce the overall risk adjusted capital cost in the process.”
Lancashire has said it will invest approximately $33 million in Saltire Re I with the rest coming from third part investors. Saltire Re I will underwrite a combined exposure ultimate net loss aggregate reinsurance product for the January 2013 reinsurance renewal season.
The company has also launched Saltire Management, which is wholly owned by Lancashire and will provide underwriting services to Saltire Re I.
