Best States Position on Sidecars

June 19, 2006

A.M. Best Co. has taken note of the increase in the use of sidecars as a way to offer rated debt to investors seeking exposure to various layers of catastrophic risks.

“The tightening of reinsurance capacity in the property/casualty market has made the use of ‘sidecars’ an attractive alternative to traditional retrocession,” Best said.

“A sidecar is a limited-life special purpose entity that generally provides property catastrophe quota-share reinsurance exclusively to its sponsor,” the rating agency explained. “In the past, A.M. Best has evaluated the capacity and general creditworthiness of sidecars to determine, in general, whether sidecars will strengthen, weaken, or have no effect on the financial strength ratings of the sponsoring reinsurers.

“The analyses focused on the structural integrity of the transactions and the analytical rigor applied by various experts and advisors, such as peril modelers and investment banks. However, A.M. Best will now go one step further to publish issuer credit ratings and/or debt ratings, where appropriate, on all sidecars and their corresponding debt (if any).”

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