Sidecar investors “handsomely rewarded” for commitment in 2023: Aon

Investors in reinsurance sidecar structures have been “handsomely rewarded” for their commitment to the product in 2023, broker Aon has said, as these reinsurance-linked investments have experienced strong returns of above 30% in some cases.

It’s not just higher reinsurance rates and ultimately performance of the underlying business that have benefited reinsurance sidecar investors in 2023, it’s also the lack of major catastrophe losses around the world.

On top of that, we’d add that the terms of collateralized reinsurance sidecar structures have been improving over the last few years and this has also aided performance of sidecar returns, making them a more attractive investment again.

Aon’s Reinsurance Solutions explained, “Sidecar investors have been handsomely rewarded for their commitment to the product in 2023”

Adding, “Given strong underlying reinsurance margins and the absence of major global natural catastrophes in 2023, sidecar investors have in some cases achieved returns of more than 30 percent.”

We’ve seen and covered a number of sidecar renewals for 2024 so far, but the majority of these structures don’t get publicised and so we only have details on those where announcements are made, or our sources inform us.

But Aon said that the renewals this year, for sidecars, have been completed relatively smoothly, with the performance seen in the reinsurance sidecar space in 2023 attracting investors to commit again for the coming year.

“Renewals have therefore been relatively straight forward as investors have been willing to commit to another year of similarly well margined underlying reinsurance business,” Aon explained.

From the investor perspective, investing into a reinsurance sidecar provides a way to sit alongside a reinsurer, sharing in its profitable performance, or in its losses, given the proportional nature of these reinsurance agreements.

So alignment is deemed strong and as a result the capital backing quota share sidecars is an integral piece of support for sponsoring insurers or reinsurers, especially those with a focus on, or seeking to grow into, property catastrophe risks.

It’s worth considering though that, while sidecar investors may have achieved returns of more than 30% in some cases, had the market experienced more large catastrophe losses around the globe in 2023, it could have been very different.

Sidecar returns can erode more quickly than those in the catastrophe bond market, for example, depending on the types of losses experienced.

This is especially true when loss activity is focused on perils other than US wind, or on multiple small-to mid-sized US hurricane events, as this can mean sidecar returns are eroded faster than the pace we would likely have seen in the catastrophe bond market.

With the cat bond market having delivered returns of close to 20% in some cases in 2023, some investors may ask whether the potential extra volatility that lives in the sidecar market is worth assuming.

Under the right (wrong) loss circumstances, cat bonds could easily have proved the better investment in 2023, given the higher layer in reinsurance and retrocession towers that those structures typically occupy.

But sidecars are very attractive to certain types of investors who are willing to be exposed to more volatility.

Given the continued higher reinsurance pricing and expected stronger performance of reinsurers as a result, many sidecars are likely to deliver good returns again in 2024, catastrophe loss activity allowing.

View details of many reinsurance sidecar transactions in our directory.