Lancashire CEO Lauds Unique Nature of $250 Million Property Retro Sidecar

Lancashire Holdings Ltd. said it will launch Accordion Reinsurance Ltd., a fully collateralized sidecar quota share reinsurance arrangement with an innovative capital draw-down feature. The structure of the sidecar, according to Richard Brindle, the group chief executive officer of Lancashire, is unique in that investors can keep their money until Lancashire needs it.

Accordion will be flexibly capitalized for up to $250 million, and will act as a quota share reinsurer of Lancashire Insurance Co. Ltd. on its worldwide property retrocession business.

Lancashire will put up $50 million of the capital, with outside investors supplying the remaining $200 million.

"One problem with sidecars is because investors are chasing certain investment return hurdles, there's pressure on insurers to put the capital to use straight away," Brindle said. "That works fine in a market like 2002, but in a market like 2005, 2006 and 2007 -- where the impact of events in question can take some time to fully crystalize in the market -- the investors only have to pay the capital when we match it to specific deals. It's not suddenly a hard market, but a market in transition. We think it's a great innovation, because it doesn't force companies to write too much business too soon."

The accumulation of international property catastrophe losses during 2010 and 2011, which in many cases were more than companies expected, combined with the expected impact of the new RMS version 11, have changed the perception of catastrophe risk, Brindle said.

"Companies are looking at the frequency of cat events over the last year or so and are rethinking their reinsurance buying approach," Brindle said. "We're of the view there will be restricted supply and increased demand in the U.S. and international retro market."

Last month, Alterra Capital Holdings Ltd. launched a new sidecar to write retrocessional coverage. New Point IV was also formed to write collateralized property catastrophe retrocessional coverage (BestWire, April 5, 2011).

Robert DeRose, vice president at A.M. Best Co., said both sidecars "are in response to perceived market opportunities, specifically in the retro market, that may have resulted from losses in the first quarter."

However, he said two sidecars do not make a trend.

"Lancashire and Alterra are certainly prepared for the market opportunities if they materialize, but whether or not more capital comes into the market remains to be seen," DeRose said.

All contracts reinsured by Accordion will be collateralized for the benefit of Lancashire to the full extent of Accordion's potential policy liability. Subject to authorization by the Bermuda Monetary Authority, Accordion will be a special purpose insurer. Accordion’s holding company is owned by a small group of capital providers. Brindle declined to name the investors, but described them as major U.S. insurance industry investors.

This is the second sidecar for Lancashire, which operated an energy-related sidecar in 2006, Brindle said.

Lancashire Insurance Co. Ltd. currently has a Best's Financial Strength Rating of A- (Excellent).

(By Meg Green, senior associate editor, BestWeek: Meg.Green@ambest.com)