Crashing into the [white] mountain

The 2005 string of cats has effectively wiped out Olympus Re, the White Mountain sidecar that was the first of its kind.

Sidecars are usually privately-backed reinsurers that underwrite specific elements of a risk, most commonly the cat bits. They allow carriers access to external capital, often from hedge funds and private equity firms, thus helping to write higher-risk business without excessive risk to their own balance sheets. Well, that’s the theory. Their use has blossomed recently, with almost $2.5 billion raised through seven deals over the past year. Montpelier Re, Arch Capital and XL Capital are among the leading players to have set up sidecars recently.

“It will be interesting to see if the 2006 hurricane season tests the solvency of the industry’s new fleet of sidecars just as the 2005 season crippled Olympus,” said Ron Bobman of Capital Returns LP, a New York hedge fund focused on the insurance industry.

Source: MarketWatch