Inside the Reinsurance Sidecar

As property catastrophe reinsurance companies suffer losses stemming from Hurricanes Katrina, Rita and Wilma,many have raised capital in the public markets to allow them to underwrite for 2006 renewals.The traditional means of raising capital include the issuance of equity or catastrophe bonds through public offerings. A company might also reduce its property catastrophic writings but thatwould require the reinsurer to give up position in the market,and thus reduce its ability to take advantage of any improved rates and terms post-Katrina.An alternative structure that offers certain advantages over traditional offerings is known as a "reinsurance sidecar."

Four sidecars have been established post-Katrina: Cyrus Re, Flatiron Re, Rockridge Re and Blue Ocean Re. All of these sidecars are Bermuda insurance companies established with funds raised in private placements to third-party investors. The newly created sidecar is intended to reinsure risks from an established reinsurance company