Alterra Capital Holdings Ltd.'s recent move to set up a sidecar to write property catastrophe retrocessional business likely doesn't signal a return to widespread use of such vehicles at this time, observers say.

Sidecars are special-purpose vehicles, often capitalized by hedge funds, that provide capacity to existing reinsurers by assuming risk, typically through quota-share reinsurance contracts of a short duration. The sidecar collects a percentage of premiums in return for assuming the risk, which generally is property catastrophe reinsurance.

The reinsurance market saw a surge of sidecar formations after the 2005 hurricanes, but their popularity has declined steadily since due to the soft market, abundant capacity and modest catastrophe losses.

“A big event is what it will take for the creation of new sidecars,” said Jon Wright, director in the insurance group at the Charlottesville, Va.-based research firm SNL Financial L.C. “With reinsurers it's feast or famine, and most of the time it's been famine.”

This year already has been an expensive one for insurers and reinsurers, as several large-scale disasters have produced large losses. Most recently, the devastating earthquake and tsunami in Japan produced insured losses estimated at $25 billion to $30 billion (see related story).

As a result, reinsurers “are sitting around at the moment saying "I'm OK now, but we haven't even gotten to the hurricane season this year,'” said Steven K. Bolland, president of the New York firm Gill & Roeser Inc., which provides services ranging from reinsurance broking to capital strategies. “A lot of people are looking into planning what they're going to do if something else occurs.”

Some reinsurers aren't waiting for something else to happen.

Given the recent catastrophes, Alterra's sidecar was a “very timely addition of capacity” to write new business, the Bermuda reinsurer's president and CEO, Marty Becker, said in a statement.

Alterra worked with Stone Point Capital L.L.C.—which formed when Marsh & McLennan Cos. sold its private equity subsidiary, MMC Capital, to the unit's management in 2005—to set up the New Point IV sidecar, with each party committing up to $100 million into the entity. Alterra expects that New Point IV will start doing retro business in May, subject to market conditions. The entity can continue existing for a year unless terminated earlier, and it may be extended another year, according to a filing with the Securities and Exchange Commission.

Alterra last week estimated that its losses as a result of the March 11 earthquake and tsunami in Japan could range from $60 million to $100 million before taxes and net of reinsurance and reinstatement premiums. The company said it could be exposed to an additional loss of $25 million on a catastrophe bond.

New Point IV has less competition in the sidecar market than it would have had several years ago.

After the huge 2005 hurricane losses, the next year saw the formation of 20 sidecars representing $4.5 billion in capacity, according to Oldwick, N.J.-based ratings agency A.M. Best Co. Inc. Those sidecars quickly raised money and enabled investors to get in on reinsurance business when profits were abundant. By 2007, though, with a mild catastrophe season and a weakening market, eight sidecars were formed, representing $1.87 billion in capital, according to Best.

In 2011 there are still a few sidecars around that have the capacity to do around $1.70 billion of business, according to a tally of the deals that were announced by the reinsurers who made them. One sidecar alone—Pembroke, Bermuda-based RenaissanceRe Holdings's 2001-formed DaVinci Reinsurance Ltd.—makes up more than $1 billion of the sidecar capacity in the market.

The market in recent years has been “dormant,” said Asha Attoh-Okine, managing senior financial analyst in insurance-linked securities at Best. “Hopefully there might be a surge in those sidecars, but we haven't seen anything happen yet,” he added.

In many cases, the investors who poured money into sidecars years ago have moved on to other kinds of investments.

“They saw other, more immediate opportunities, such as in distressed credits,” said James M. Doona, managing director in the capital markets risk trading unit at the German reinsurer Munich Reinsurance Co.

The extent of this year's losses will be critical.

“Of course we're constantly thinking, especially after losses like now,” said Axel Wichmann, senior underwriter at the Germany-based reinsurer Hannover Re Group.

“You're always discussing with existing investors about ideas for next year, but you can't really predict what everyone will do.” In mid-September the industry will know what the hurricane season has brought. “Most investors will wait for the hurricane season to decide what to do,” he said.