Casualty sidecars emerging as third pillar, sponsors urged to act: HCMA

Executives at Howden Capital Markets & Advisory (HCMA) have indicated that as traditional casualty capacity remains constrained, casualty sidecars are becoming a genuine third pillar alongside traditional reinsurance and the balance-sheet, moving beyond being a specialty product for a select number of sophisticated investors.

HCMA, the capital markets and insurance-linked securities specialist unit of broking group Howden, recently conducted a roundtable, that explored the surge in momentum that’s being seen across the casualty reinsurance sidecar market.

The roundtable featured Jarad Madea, CEO of HCMA; Phillip Kusche, Co-Head of global ILS and Chair of HCMA Europe; and Cate Kenworthy, Managing Director.

Whilst discussing the wave of activity that’s currently being displayed in the market, Kusche indicated that the surge in casualty sidecars is primarily being driven by ongoing, rapid growth in interest within the casualty and long-tail side, as opposed to any signs of a slowdown.

“Many of our clients are increasingly reviewing the possibility of creating partnerships with investors to optimise their capital structure and convert some of their underwriting income into more stable fee income as well as supporting their growth in certain areas. We see this across the board from insurers, reinsurers, and MGAs,” Kusche said.

“That approach is similar to what has been very common practice on the property catastrophe side where sidecar structures have been in place for a long time and form part of their capital structure. Additionally, we are seeing different platforms used for these structures, mainly Bermuda but also Lloyd’s, which is a market Howden is particularly focussed on,” Kusche continued.

According to Kenworthy, this approach matches up against what HCMA is hearing from investors across the market.

“A lot of interest is coming from credit-focused asset managers applying a playbook they’ve already run in life and annuity, taking on long-duration liabilities and running the asset side conservatively for spread. Casualty premiums are collected years before claims are paid, creating a long-duration pool of capital, often around seven years, that suits how these managers like to deploy funds. Structures like Bermuda and Lloyd’s sidecars let them act as capital partners to cedents, backing casualty risk in exchange for access to that float, with returns that can approach private-equity levels and a defined, forward exit,” Kenworthy explained.

Adding further insight, CEO Madea emphasised that this is the dynamic that HCMA wants its clients to think about when it comes to approaching casualty sidecars.

“There is a lot of capital out there right now that is genuinely interested in this exposure. It might not necessarily still be there in the same way in two years, so the sponsors moving first are the ones who benefit most,” Madea noted.

The executives also outlined that investors that show interest in investing casualty sidecars, are not the same buyers as cat bonds.

“Cat bond and ILS demand tends to come from two quite different buyer types, and neither one really maps onto casualty. On one side you’ve had opportunistic hedge funds coming into cat risk after events like Hurricane Ian, drawn in by a dislocated market. Casualty doesn’t really have an equivalent moment pulling that kind of capital in. On the other side, you’ve got institutional investors like pension funds, who like cat bonds for the short liquidity and the genuine diversification they offer. Casualty doesn’t fit that profile either, since it’s a longer-duration, less liquid position, and because it tracks broader credit and economic conditions, it doesn’t give you quite the same diversification benefit,” Kenworthy outlined.

She continued: “What we’re really seeing is a third type of buyer altogether: credit-focused asset managers running a long-duration strategy in search of private-equity-like returns, which is a different animal from both of the cat bond buyer types. So the growth in casualty isn’t cat money rotating over; it’s more a case of a separate pool of capital finding its own way into the market.”

Adding to this, Kusche said: “That is consistent with what we see on relative value too. Cat bonds still stack up well against high-yield credit, so that demand is holding even as pricing softens. It is a good example of two different investor bases growing at the same time rather than one cannibalising the other.”

Importantly, Madea highlighted that this is good for sponsors, emphasising that the capital diversification argument holds up either way. “You are not choosing between cat bonds and sidecars. In the right circumstances, you can be building both,” the CEO said.

All of which leads Madea to say that while there is meaningful capital looking for this kind of exposure today, sponsors that choose to make their move now will have an easier time securing capacity on good terms, rather than the ones who choose to wait until the market tightens.

“This fits the broader theme we have been talking to clients about all year: take the opportunities that are on offer today, before the cycle forces your hand,” Madea said.

“The structures on the table vary. Some are built around a single line of casualty business. Others are broader, whole-account arrangements that give sponsors more flexibility but require more work upfront to structure and market to investors,” HCMA added.

Either way, HCMA executives emphasise that the direction of the market is clear: “as traditional casualty capacity remains constrained, sidecars are becoming a genuine third pillar alongside traditional reinsurance and the balance sheet, not just a speciality product for a handful of sophisticated sponsors.”

Find details of numerous reinsurance sidecar investment arrangements, including casualty sidecars, in our directory of reinsurance sidecar transactions.