One of the first reinsurance sidecars, Olympus Re, to be wound up

The Olympus Re reinsurance quota share sidecar vehicle is being wound up, a report says. The third-party capital backed collateralized reinsurance vehicle faced serious losses from the 2004/2005 hurricane season and never fully recovered.

Founded in 2001 at a time when the catastrophe reinsurance market was seen as buoyant and full of opportunity to make attractive returns, Olympus Re was among the first reinsurance vehicles to be established with a quota share, sidecar type structure.

Olympus Re was set up by White Mountains Insurance Group, under the watch of Chairman Jack Byrne, with $500m of capital, from a range investors including Franklin Mutual Advisors, money managers Third Avenue and Fairholme Capital, hedge fund Och-Ziff Capital Management and Leucadia. Byrne and other White Mountains executives from the time including Steve Fass, also put capital into Olympus Re.

Olympus Re launched at a time when the reinsurance market had been drained of capacity, to an extent, by events such as the 9/11 terrorist attacks. The plan was to take advantage of the reduced capacity, to bring in lower-cost third-party money which would share in the fortunes of White Mountains book and other sources of risk.

Olympus Re was hit by the 204 hurricane season, costing it $100m, but it was the 2005 hurricane season that dealt Olympus Re a blow, draining the sidecar of capital and losing investors a significant amount of money. At this time the vehicle was said to have $650m of capital from investors.

A recapitalisation occurred but continued development on the 2005 hurricane losses caused further issues and in the end were fatal. White Mountains reimbursed some investor capital in order to prevent them losing everything.

Now, according to the Royal Gazette, the members of Olympus Re Holdings met on the 23rd February and resolved to wind up the sidecar completely, bringing to an end the difficult story that was Olympus Re.

A liquidator has been appointed, according to the Gazette, to assist with the wind down of the reinsurance sidecar. Given Olympus Re had written largely catastrophe risks it is unlikely there are any ongoing liabilities, or if there are they will likely be relatively easy to run-off.

Olympus Re was a big sidecar, launched very early in the days of collateralized reinsurance vehicles. It was perhaps unlucky to launch and face the 2004 and 2005 hurricane years, however its catastrophe focused strategy meant it was exposed to these events in a big way.

The Olympus Re sidecar example should be a lesson to investors that when investing in reinsurance losses will happen and they can be fatal for the vehicle and lose significant sums. The promise to pay when catastrophes happen, which is the whole reason for insurance and reinsurance, means that investors need to be prepared to lose capital. However, over the longer term, the returns and low correlation make that a risk worth taking for most.

Olympus Re was perhaps just unlucky to face such severe events so quickly after its launch. This will happen again. At some point in the future we will see major hurricanes or earthquakes that cause tens of billions of dollars of loss to the insurance industry. When that happens the insurance-linked securities (ILS) and collateralized reinsurance industry will be tested. The Olympus Re case shows, despite what some may say about ILS capital, that investors were willing and able to pay their claims as long ago as 2005.