Casualty Sidecars: An HCMA Roundtable

Casualty sidecars have moved from a niche structure discussed at the margins of the market to a live topic of execution, with interest spanning primary carriers, reinsurers, MGAs, and fronting companies. We sat down with three members of the HCMA team, each looking at the trend from a different angle, to talk through what is actually driving it.

What is actually driving the current wave of casualty sidecar activity?

Philipp Kusche: On the casualty and long-tail side specifically, we are seeing continued, rapid growth in interest rather than any slowdown. Many of our clients are increasingly reviewing the possibility of creating partnerships with investors to optimise their capital structure and convert some of their underwriting income into more stable fee income as well as supporting their growth in certain areas. We see this across the board from insurers, reinsurers, and MGAs. That approach is similar to what has been very common practice on the property catastrophe side where sidecar structures have been in place for a long time and form part of their capital structure. Additionally, we are seeing different platforms used for these structures, mainly Bermuda but also Lloyd’s, which is a market Howden is particularly focussed on. 

Cate Kenworthy: That matches what we are hearing from the investor side, and I would add why they are showing up now. A lot of interest is coming from credit-focused asset managers applying a playbook they've already run in life and annuity, taking on long-duration liabilities and running the asset side conservatively for spread. Casualty premiums are collected years before claims are paid, creating a long-duration pool of capital, often around seven years, that suits how these managers like to deploy funds. Structures like Bermuda and Lloyd's sidecars let them act as capital partners to cedents, backing casualty risk in exchange for access to that float, with returns that can approach private-equity levels and a defined, forward exit.

Jarad Madea: Completely agree, and that is exactly the dynamic we want clients thinking about. There is a lot of capital out there right now that is genuinely interested in this exposure. It might not necessarily still be there in the same way in two years, so the sponsors moving first are the ones who benefit most.

Who is actually investing in these structures, and are they the same buyers as cat bonds?

Cate Kenworthy: Largely not, and that distinction matters. Cat bond and ILS demand tends to come from two quite different buyer types, and neither one really maps onto casualty. On one side you've had opportunistic hedge funds coming into cat risk after events like Hurricane Ian, drawn in by a dislocated market. Casualty doesn't really have an equivalent moment pulling that kind of capital in. On the other side, you've got institutional investors like pension funds, who like cat bonds for the short liquidity and the genuine diversification they offer. Casualty doesn't fit that profile either, since it's a longer-duration, less liquid position, and because it tracks broader credit and economic conditions, it doesn't give you quite the same diversification benefit. What we're really seeing is a third type of buyer altogether: credit-focused asset managers running a long-duration strategy in search of private-equity-like returns, which is a different animal from both of the cat bond buyer types. So the growth in casualty isn't cat money rotating over; it's more a case of a separate pool of capital finding its own way into the market.

Philipp Kusche: That is consistent with what we see on relative value too. Cat bonds still stack up well against high-yield credit, so that demand is holding even as pricing softens. It is a good example of two different investor bases growing at the same time rather than one cannibalising the other.

Jarad Madea: Which is good news for sponsors, frankly. It means the capital diversification argument holds up either way. You are not choosing between cat bonds and sidecars. In the right circumstances, you can be building both.

So what should sponsors actually be doing about this right now?

Jarad Madea: Getting in front of the line. There is meaningful capital looking for exactly this kind of exposure today, and the sponsors who move now will have an easier time securing capacity on good terms than the ones who wait until the market tightens and everyone else has had the same idea. This fits the broader theme we have been talking to clients about all year: take the opportunities that are on offer today, before the cycle forces your hand.

What to watch

The structures on the table vary. Some are built around a single line of casualty business. Others are broader, whole-account arrangements that give sponsors more flexibility but require more work upfront to structure and market to investors.

Either way, the direction is consistent across all three perspectives above. As traditional casualty capacity remains constrained, sidecars are becoming a genuine third pillar alongside traditional reinsurance and the balance sheet, not just a speciality product for a handful of sophisticated sponsors.