Insurance Insider: Endurance sets sight on $200 Million Florida sidecar

Bermudian (re)insurer Endurance Specialty Holdings is marketing a collateralised Florida-only sidecar vehicle to provide it with additional reinsurance capacity at the fast-approaching US mid-year renewal season, The Insurance Insider can reveal.

The news comes as a number of other (re)insurers are again approaching potential investors with a view to resurrecting previous sidecar structures to enable them to write additional US cat business, in anticipation of bumper rates caused by an expected capacity squeeze.

However, it remains to be seen whether investors can be tempted by short-term (re)insurance vehicles which, while offering the potential for high returns, have no liquidity at a time when cash is king.

It is thought that Endurance, which previously ventured into the capital markets arena with its 2006 Shackleton Re cat bond, is seeking $200mn for the vehicle; this would include equity as well as an unspecified debt tranche depending on market conditions.

Barclays is understand to be arranging the transaction – believed to be named “Solstice” – through its New York office.

The vehicle would support the company’s balance sheet with a quota share reinsurance of its Florida underwriting. Significant incremental reinsurance demand is expected to come from the Sunshine State as a result of expected changes to its cat fund.

It is thought that Endurance has received interest from potential equity and debt investors, but with lingering doubts over exactly what Florida legislators will do, it is not yet certain of meeting fundraising targets for the vehicle.

There is also uncertainty over investor appetite for sidecar-style transactions. This is both because of continued difficult conditions in the equity and debt markets, and concerns over the lack of liquidity in sidecar transactions, where investors are effectively locked in for the term of the transaction.

A decision is expected in the coming weeks.

According to market sources, a number of other players have been looking at bringing back new versions of previous sidecar models.

It is thought that Montpelier Re has approached potential investors with a view to redoing its Blue Ocean Re sidecar, which was wound down in early 2007. Meanwhile, sidecar pioneer RenaissanceRe is understood to have looked at bringing back its Florida reinstatement premium vehicle Timucuan Re, which was initially launched in the aftermath of Hurricane Katrina.

Meanwhile, Harbor Point is also believed to have sought investors for a repeat of its Bay Point Re retro vehicle.

The interest in rekindling the sidecar structure – which was largely retired in 2007 as capacity pressures were eased in the cat reinsurance and retro markets – has been fuelled by capital pressures in the reinsurance industry.

With the squeeze compounded by last year’s heavy cat losses, some have predicted capacity may dry up at 1.6 and 1.7 renewals for wind exposed cat cover. In particular, some of the sector’s biggest players appear to have a lower appetite for writing the business, most notably Berkshire Hathaway.

Meanwhile, Florida has its own set of issues which have created the potential for significant incremental demand for private reinsurance from the state’s insurers.

Although the Florida Hurricane Catastrophe Fund (FHCF) has decided not to buy private reinsurance in 2009 itself or renew the put option it bought from Berkshire Hathaway last year, reforms to its temporary increase in coverage limit (TICL) could boost demand for increased limits of indemnity from the private reinsurance market.

If, as has been mooted, the TICL were scaled down by a third for the 2009 year, Aon Benfield predicts incremental demand in limits of $2.5-3bn would come back into the private reinsurance market, if insurers fully replace what the layer was covering.

And the viability of what would remain of the TICL layer is also under threat, with the FHCF only obliged to pay out what it is financially able to do so. This means that any Florida insurer buying into the TICL layer would be effectively at the mercy of a potential federal rescue if a large hurricane were to strike.