‘Disposable’ Bermuda Sidecars Blasted
Berkshire Hathaway Inc.’s Franklin [Tad] Montross has criticised Wall Street, private-equity firms and some Bermuda operations for creating “disposable” sidecars he claims may not have the backing of their founders in three to five years.
“The investment term is obviously out of sync with the duration of the liabilities,” Montross, chief executive officer of Berkshire’s General Reinsurance Corp., said in a recent statement. “This mismatch is unlikely to play out well 10 or 20 years down the road.”
The Bloomberg financial news service reports that Berkshire, headed by billionaire Warren Buffett, is facing competition from new entrants to the reinsurance market as wind storms, floods and earthquakes weigh on results at established carriers.
Stone Point Capital LLC, the private-equity firm overseen by Goldman Sachs Group Inc. director Stephen Friedman, teamed with Bermuda’s Alterra Capital Holdings Ltd. in April to back policies through a pool of capital known as a sidecar.
“Sidecars have been the rage to offer catastrophe capacity for just one year, effectively creating a disposable reinsurer,” said Mr. Montross, whose General Re is based in Stamford, Connecticut. “Several years ago I quipped, disposable razors and diapers — why not disposable reinsurers?”
Primary insurers typically turn to sidecars for coverage of short-term risks focused in specific areas.
The insurance industry faced about $70 billion of losses from natural disasters and man-made catastrophes in the first half, according to Swiss Re, the world’s second-largest reinsurer. That makes 2011 already the second-most costly year for insurers, surpassed by 2005, when Hurricane Katrina contributed to $120 billion in claims.
General Re’s annual revenue has declined in each of the last three years to $5.69 billion in 2010. Mr. Buffett, Berkshire’s chairman and CEO, bought the reinsurer for $18 billion in 1998 in what was then his biggest acquisition.
Peter Hill, a spokesman for Alterra, declined to comment on Mr. Montross’s remarks. The Alterra sidecar, New Point IV, was capitalised by the reinsurer, Stone Point and others, he added.
Validus Holdings Ltd., the Bermuda-based reinsurer, raised money for a sidecar that it said in June will write business through December 31, 2012, subject to extension.
Bermuda’s RenaissanceRe Holdings Ltd. also tapped investors to fund the DaVinciRe underwriter it runs, and CEO Neill Currie said in a June statement that the “ability to access and deploy third-party capital” helps the reinsurer serve clients.
