Sidecars - Sidecars: bolt-on capacity for an uncertain world.

(From Reinsurance)

There is a new word that will have to be added to business dictionaries from the new company formations post Hurricane Katrina - the sidecar.

This is a new kind of reinsurance vehicle where a sponsor reinsurer has found a novel way to stay in volatile markets such as retrocession while passing the business, and its associated risks and capital loadings, off its balance sheets to the sidecar.

So far, four have been set up - all offshore - Rockridge Re, Cyrus Re, Blue Ocean and Flatiron Re. They are different from the others in the Class of 2005 because they only take business from their founders, and may only have a limited lifespan. They are a new, imaginative, alternative-risk-transfer vehicle set up as their own entity, usually with a time limit to their existence.

And the cash from hedge funds and private equity lining up to back them is a testament to a new trend that may be about to take off. The first to start the move towards sidecars was Montpelier Re. Bosses there did it before Katrina was even a breeze off the coast of Africa and before they took one of the biggest hits in the industry.

New sidecar companies

Rockridge Re was set up with just $91m in capital by Montpelier with Bermudian hedge fund and asset management firm West End Capital to assume higher-layer, short-tail risk from Montpelier Re.