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Post-Hurricane Andrew reinsurers consolidated in later years

Sidecar arrangements take over as vehicles for raising capital

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And then there was one.

Of the eight property catastrophe specialty reinsurers formed after Hurricane Andrew, only two—PartnerRe Ltd. and RenaissanceRe Holdings Ltd.—remain as independent entities, and only RenRe continues to specialize in the property cat market (see box).

“We thought we were best served to remain a stand-alone company for our shareholders,” said Neill A. Currie, president and CEO of RenaissanceRe and a company co-founder.

However, he noted that while property cat remains RenaissanceRe's core business, it also has diversified over the years, including running a Lloyd's operation.

The disappearance of most of the post-Andrew reinsurers was no surprise, say observers.

“I think we all kind of expected that the marketplace would continue to grow and that larger players would ultimately acquire smaller ones,” said John DeMartini, New York-based leader of Towers Watson & Co.'s catastrophe risk management practice.

“It's been that way internationally, it's been that way domestically. It was bound to happen in Bermuda as well,” said Mr. DeMartini.

“In the over 20 years since Hurricane Andrew, you basically saw the natural evolution of companies consolidating and growing and becoming bigger. So both (Ace Ltd.) and (XL Capital Ltd.) purchased one or more of those post-Andrew entities, and others consolidated among themselves into large entities,” said W. Marston Becker, president and CEO of Alterra Capital Holdings Ltd. in Hamilton, Bermuda.

“Initial investors were reacting to market dislocations and had the opportunity to make some unusual profits for a short period of time,” said Paul Kneuer, senior vice president at New York-based reinsurance intermediary Holborn Corp. “And when that period was over, they were happy to exit, and other people in the insurance and reinsurance businesses were happy to take over those operations.”

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Today, sidecars are more likely to be formed than new catastrophe reinsurers, said Steven K. Bolland, president of New York-based reinsurance intermediary Gill & Roeser Inc.

Sidecars, as vehicles that can be used to rapidly invest and then withdraw capital, address the dramatic ups and downs of catastrophe pricing that occur in response to market cycles, say observers.

Sidecars “give the investors the ability to really take advantage of the hard market cycle more efficiently” and avoid its troughs, said Robert DeRose, vice president at Oldwick, N.J.-based rating agency A.M. Best Co.

“Capital still flows to Bermuda. It just flows in a different manner than it did after Andrew,” Mr. Bolland said. “It's just a more effective way of doing the same thing.”

Mr. Becker said, “The reality is that Bermuda has enough companies, so therefore, to deal with these ebbs and flows of capital demand, sidecars have become a more efficient vehicle.”

But how long sidecars will continue to remain popular is a question.

Paul Markey, chairman of Aon Group (Bermuda) Ltd., said, “It remains to be seen, if there are added losses that take capital out of the business, whether new capital would strictly come in the new form” of sidecars, “or whether some investors might take the view that they want to build a company on the old model, which is a more broadly based long-term structure.”

“Over the years, Bermuda has adjusted to do what appears to work best for them,” Mr. Bolland said. “I'm sure in 10 or 15 years' time, something else will be the flavor of the day. But at the moment, that's what worked in the last cycle.”