Sidecars in favour, with most pitching 20%+ returns: Investors at Aon webinar

Reinsurance sidecar vehicles are in favour right now, with investors liking the certainty they provide in terms of duration and seeing them as an attractive way to capitalise on a hard reinsurance market that is of unknown duration, while the returns are clearly much-improved as the majority are pitching 20% plus returns.

This is according to a group of insurance sector investors speaking during a webinar held by Aon’s Reinsurance Solutions division yesterday.

The participating investors access insurance and reinsurance linked returns in a variety of ways, having backed what we’d consider insurance-linked securities (ILS) structures including sidecars, as well as making private equity investments into balance-sheet carriers, distribution plays, MGA’s and primary market writers.

Sidecars were raised as an attractive opportunity at this point in the reinsurance market cycle, with the participants citing attractive returns on offer and importantly the ability to know when your exit point might be.

Kathleen Monaghan, Managing Director, Capital Advisory at Aon, said that sidecars have been a beneficiary of the capital flows seen from investors in 2023 so far.

“We estimate at Aon, about 10 to 15 billion of new capital has entered the market, but largely in the form of sidecars or really niche investments, or to existing players,” Monaghan said.

We recently reported that Aon had shared data showing a return to growth for the reinsurance sidecar sector in 2023, with volumes having reached approximately $7.1 billion.

Participating in the webinar as a panelist, Matt Botein, a co-founder and Managing Partner at Gallatin Point Capital, explained that investors are showing an appetite for, “Structured investments like sidecars, where the path to exit is clear and pre-wired.”

Botein went on to explain that he has experience in the reinsurance sidecar space, having invested in the Cyrus Re sidecar sponsored by XL in the mid 2000’s, as well as more recently in a sidecar vehicle in the legacy insurance space.

On how investors think about sidecars, Botein said that, “I think investors put it much more in the equity category, whereas ILS tends to be more remote, cat bonds tend to be more remote, they tend to compete more for fixed income capital.

“On the side cars, I think it really is advantaged on the basis of exit predictability, or at least contractual exit predictability and I think it’s something we’ll see more of, particularly as investors begin to get more nervous about the remaining duration of the hard market. A natural pivot is into a sidecar structure.”

Jack Sun, Managing Director, Insurance at investment firm Bain Capital, also said that the current timing in the market cycle could make reinsurance sidecars a more attractive option.

“As we were thinking through whether just sponsoring a new balance-sheet or sidecar would be more attractive, on the equity side could you sponsor a new balance sheet in the middle of a hard market. By the time you get going and you’ve built the book, there’s a good chance that a lot of that hard market has already passed you by and you will be exiting into a softer market,” Sun explained.

Adding, “Whereas a sidecar, you can ramp a lot more quickly and also get out and take advantage of the number of years that it is hard.”

On the availability of returns, Sun said the current crop of reinsurance sidecar pitches look attractive.

He explained, “I think it’s a little bit different depending on the investor, from what we’ve seen, especially in P&C sidecars, I don’t think I’ve seen a pitch over the last six months to a year targeting sidecar returns, especially in this higher interest rate environment, below 20.

“I think all the P&C sidecars are pitching 20 plus, probably more in the mid 20’s for many of them.”

However, he said that for a private equity focused investor a sidecar may not always offer the investment opportunity they are looking for.

Sun said, “The only issue, from an investor perspective and, the challenge that we would have with sidecars, is just that the multiple of money that you can get if we’re investing in two or three really good years, especially for a fund that focuses more on private equity, is more difficult.

“I think that return profile would work a lot better with more of a credit-focused fund, an opportunistic credit-focused fund, that takes advantage of the three years or so where the returns will be really, really good.”

Greg Share, Managing Director for the Opportunities Funds at investment firm Oaktree Capital Management L.P. chimed in to say that sidecars are one of many tools available for investors to access reinsurance returns right now.

“It’s great to have more tools for investors to participate, where they’re more able to kind of customise the product to their needs, in terms of book, and risk, and return, and the like.

“So I just see it proliferating. I don’t think it’s a sidecar versus ILS versus a balance sheet. I think we’re gonna see more and more of the ecosystem continue to evolve and having more of those flavours.”