Sidecars are the 鈥渟hiny new cars on the road鈥 in the life insurance industry, often leveraging outside capital and expertise through an affiliated reinsurance entity.
As 69色情片 knows firsthand, a sidecar strategy can offer many accretive attributes, such as supporting growth and fostering valuable partnerships. In other cases, sidecars can be challenging and lead to too many hands on the steering wheel, perhaps all pulling in different directions. Ensuring alignment across stakeholders involves carefully designing all the features of the sidecar to ensure it runs smoothly. The associated resource allocation requires strong organizational commitment to the strategy; otherwise, getting through fundraising may be insurmountable.
With the expectation that a number of life insurers will explore the use of sidecars in the coming years, this paper lays out important factors and alternatives for life insurers to consider before going down the sidecar route. In particular, the asset-intensive market offers a number of proven, unaffiliated reinsurers that can deliver complete solutions at attractive terms. Assessing the trade-offs between sidecar and traditional reinsurance can help determine the vehicle best equipped for the journey ahead.
While more than 200 property and casualty sidecars have been announced since they came to the fore after the 2005 hurricane season, they now are gaining significant interest among life and annuity (re)insurers. Traditionally, sidecars serve as risk-sharing vehicles that utilize third-party capital to improve an insurance company鈥檚 metrics. In the past five years, several life insurers, often with some level of private equity ownership and/or asset origination and management capabilities, have established their own sidecars:
| Year | Lead Co. / Asset Manager | Sidecar |
| 2023 | 69色情片 / 69色情片 | Ruby Re |
| 2023 | Prudential / PGIM and Warburg Pincus | Prismic Re |
| 2023 | Athene / Apollo | ACRA 2 |
| 2023 | Global Atlantic / KKR | Ivy Re 2 |
| 2023 | Kuvare / Davidson Kempner | Kindly Re |
| 2022 | American Equity LIC | AEL Bermuda Re |
| 2022 | Massachusetts Mutual / Barings | Martello Re |
| 2021 | Security Benefit / Eldridge | SkyRidge Re |
| 2020 | Global Atlantic / KKR | Ivy Re |
| 2019 | Athene / Apollo | ACRA |
While many recent sidecar strategies have focused primarily on de-risking while growing assets under management (AUM) to preserve fee income, several additional reasons to consider a sidecar have emerged:
Typically, an asset manager desiring a mandate for the sidecar鈥檚 assets will acquire a stake in the sidecar to reinforce alignment of interests. Beyond access to this AUM, the potential for high, stable returns over a defined period can attract various types of sidecar investors.
In many ways, creating a sidecar is similar to establishing an insurance company. The process often can span 18 months or much longer, requiring high organizational conviction to move down this new path. The design options have real implications for the viability of the sidecar and are deeply interconnected.
When designing the sidecar, thoughtful consideration of the following strategic questions is crucial:
Aligning these decisions across existing and new stakeholders magnifies the difficulty of arriving at the final design. All stakeholders carry notable influence over the viability of the sidecar and come with different motivations for their participation. For example:
With precedents in place and a growing focus on the sidecar space, these stakeholders will be keen on influencing the design. Additional stakeholders, including employees, policyholders, advisors, and the parent company, will clearly want to have input on the sidecar design as well. The individual goals of all stakeholders should be considered as part of the design and decision-making process.
Additionally, sponsors should be conscious of current macroeconomic conditions, which drastically differ from the environment of the past few years that contributed to the popularity of sidecars. The U.S. economy arguably faces tighter funding conditions, higher return requirements, and greater uncertainty. Given the typical timeline of establishing such vehicles, financial conditions may change markedly between the initiation and execution of the sidecar.
Fundraising for the sidecar can lead to an interesting tug of war as the sponsoring company looks to engage with potential investors without compromising its own financial objectives.
Moving from design to production to make the sidecar a reality is the most challenging part of the process. The right design is certainly a major part of being ready to deploy the capital and operate the vehicle.
A sidecar can be viewed as just a variation of other forms of reinsurance, such as a traditional full risk-transfer treaty with an unaffiliated, established reinsurer. The market for traditional reinsurance is both wide and deep with established players offering competitive solutions that often can access the same benefits and features provided by sidecars. While both sidecars and traditional reinsurance can be designed to cover the same risks using similar structures, the effort, economics, execution risk, and expertise involved can be quite different for each.
| Sidecar | Traditional third-party reinsurance |
| Major undertaking to launch, typically requiring at least 18 months from strategy to execution. In addition to ongoing management efforts, it may be difficult to change the course as conditions and needs evolve over time. | Once the strategic decision is made to move forward, a well-defined process for finding a reinsurance counterparty follows that can be done in three to six months. |
| Sidecar | Traditional third-party reinsurance |
| Expect high investor interest but also pressure to maximize returns for outside investors. Economic analysis should consider the role of fees and counterparty credit risk, which may offset pricing leverage. | Established players with leading capabilities and risk appetite can translate into favorable economics for the cedant. |
| Sidecar | Traditional third-party reinsurance |
| Potential sidecar investors may have complementary capabilities on the liability, asset, or structuring side. The sidecar can be conducive to such arrangements as there is mutual interest in performance, but the impact on fees and control must be considered. | Leverages the expertise of the reinsurer for the treaty鈥檚 design and fulfillment. Experienced reinsurers can further enhance partnership via a lead role in ongoing product design and management, sharing an interest in maintaining the policyholder base with the ceding company. |
| Sidecar | Traditional third-party reinsurance |
| While there are examples of sidecar launches, execution risk persists across the sidecar lifecycle, stemming from a range of areas, such as stakeholder alignment, investor exit options, and regulatory oversight. | Execution risk is typically lower, given a shorter time frame, bilateral (in lieu of multilateral) negotiations, and certainty of coverage. |
A sidecar might be a good addition to the holistic reinsurance and capital management strategy of a company that:
On the other hand, seeking a tailored reinsurance solution can be the prudent choice for a company that:
While sidecars can deliver significant value under the right circumstances, the costs 鈥 whether in terms of time, resources, capital, or other elements 鈥 and execution challenges should be thoughtfully and realistically considered prior to pursuing.
Early prioritization of objectives is essential in the development of the third-party capital strategy. This will inform the assessment of the notable trade-offs in pursuing the sidecar vs. other alternatives, such as traditional asset-intensive reinsurance.
Following this process will ensure that you select the right car to get to your desired destination.
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