Sidecar sponsors struggling to find sufficient capital support

Reinsurance sidecars as a source of protection are in high-demand right now, as ceding companies look to bring third-party capital support into their business models to help buffer against any potential downside caused by catastrophe losses through the year ahead.

Our sources said that demand for reinsurance sidecar capacity is perhaps as high as it has ever been, with a number of renewal structures in the market, as well as some completely new sidecar proposals.

With reinsurance rates firming and retrocession already firm (and expected to harden further in January), locking in a collateralised quota share sidecar right now looks like an attractive option for many re/insurers.

As well as the usual glut of mid-year reinsurance sidecar renewals and replacements, some of which are being better received by investors than others, we’re told, we understand that there are also some more speculative reinsurance sidecars being offered at this time, something that hasn’t been seen for quite a while.

As we understand it, the more speculative sidecar capacity being sought is largely Florida focused and these sidecars are coming from re/insurers that would like to upsize on their Florida reinsurance writings at the renewals, but require the retrocessional capacity to support growth into that peak catastrophe zone.

However, sponsors of these collateralised reinsurance sidecar issues are struggling to find adequate investor support, we’re told.

With investor confidence in general dented by the Covid-19 pandemic, meaning investor focus can often be elsewhere, while some investors are also more wary of quota share structures after facing losses during the last three catastrophe heavy years, we understand that brokers are in some cases struggling to generate sufficient investor support to make sidecars viable.

As ever, with the collateralised or insurance-linked securities (ILS) structured reinsurance or retrocession arrangement, there are economies of scale that make sidecar issuances less cost-effective or viable until a certain amount of investor support is secured.

Some sidecar sponsors are set to struggle this year, we’re told, and as a result even some of the longest-standing reinsurance sidecars could find they are smaller in size, while some of the new or more speculative sidecars may not even get completed.

We’re told time is running out for some Florida specific attempts to secure sidecar capacity and that support is still lacking.

As well as investors hesitating to support sidecars that have taken losses over recent years, the typical sidecar focused investors are also hesitant as there is some uncertainty over the potential for silent pandemic risks to sit in portfolios of property and catastrophe reinsurance at this time.

Without the ability to look through to contract wordings, which investors in a sidecar would rarely have, it’s impossible to fully understand whether any exposure to pandemics, such as a second-wave of Covid-19 or longer-tailed claims due to the current pandemic, exist in a portfolio.

As a result, we understand investors have been calling for sidecars to come with an exclusion guarantee, that they will not push pandemic claims through to their investors, but that could make what was a straight quota share arrangement a far more technical to manage affair.

We’re told almost every sidecar, no matter whether it is a regular, or flagship issued structure, or a new and speculative one, is likely to find raising capital challenging at this time.

All seem to be struggling to secure targeted levels of capitalisation, in some cases even sufficient capital support to make them viable, we’re told.

As we explained recently, there is significant uncertainty over the implications of the pandemic for sidecar and quota share investors and some believe sidecars could take some of the biggest hits from Covid-19 claims.

As a result, it’s understood that sidecar investors face the prospect of their collateral being trapped at the end of the structures terms for claims to develop, or uncertainty to clear.

This is making it tough for capital to be rolled over from one structure to the next, something that could be even more of a challenge towards the end of this year.

The uncertainty facing some sidecars may make recapitalising them incredibly difficult without a significant hike in the returns they are offering to their investors, as well, perhaps, as more stringent terms.

In 2020, it seems investors hold the keys to the success of many reinsurance sidecar issues, which gives them additional bargaining power in advance of their completion.

While the flagship and regularly issued reinsurance sidecars are a feature of the market these days and likely to receive sufficient investor support to get completed, right now the market may be challenging for newer issuers, or those seeking more speculative retro support for catastrophe books, it seems.