Converging Capital and Reinsurance Markets
Summary
Sidecars, on the other hand, are a little newer to the market - and a little more complex, [Christopher McGhee] comments. This mechanism essentially means buying a reinsurance contract from a special purpose reinsurance company, with a limited lifespan, that has been capitalized by investors. They are basically "a quota share of a portfolio business," he explains. "That's it, that's all, nothing magical about it."
"Think of them as equity capital," McGhee says of sidecar arrangements. "It's really a way to move a lot of equity very rapidly. What's interesting is [that] this mechanism allows the use of substantially more debt - it's an off-balance sheet - but you're getting more leverage that you would be able to use in the reinsurance marketplace."Increasingly, investors are finding ways to invest in insurance risk that is not in cat bond form, McGhee noted. "Most investors come to the risk transfer space first through this [cat bond] mechanism," he says. "Then they realize it is an interesting market and ask: 'We like this risk, how do we get more of it please?'" In other words, cat bonds represent the baby steps investors take before taking on reinsurance risk directly - enter the sidecar.Most of the 2005 cat season claims have been settled and 2006 proved to be a calm hurricane season, but reinsurers are nevertheless looking for ways to bolster capacity so as not to be swept away when the next tidal wave of claims hits. Christopher McGhee, managing director of Guy Carpenter's investment banking specialty practice in New York, offered insights into the new ways that reinsurance companies are expanding capacity -- in particular, cat bonds and sidecars. The important distinction between traditional and non-traditional alternative markets is becoming less relevant. Cat bonds are, very simply put, securitized reinsurance policies. As far as cat bond sponsors are concerned, cat bonds are fully-collaterized transactions. As sponsors become increasingly concerned about credit quality, especially for the most extreme events, full collateral is an attractive feature. McGhee predicts 2007 will see a decrease in cat bond activity and a dramatic drop in sidecar transactions compared to 2006.See the full content of this document
Extract
Converging Capital and Reinsurance Markets
Most of the 2005 cat season claims have been settled and 2006 proved to be a calm hurricane season, but reinsurers are never-theless looking for ways to bolster capacity so as not to be swept away when the next tidal wave of claims hits.
Guy Carpenter presented a half-day seminar in January 2006 on the specialty property market at Toronto's Hilton hotel. Christopher McGhee, managing director of Guy Carpenter's investment banking specialty practice in New York, offered insights into the new ways that reinsurance compani...See the full content of this document
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