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XL set to renew slimmed-down Cyrus sidecar

Bermudian (re)insurer XL Capital is set to renew a slimmed down version of its Cyrus Re sidecar with $105mn in capital from three tranches of loans.

Cyrus Reinsurance II Ltd will effectively replace its predecessor on 1 January 2008 when it begins accepting quota share retro risks from XL Re.

XL Re will cede 10 percent of the premium and losses from most of its property

catastrophe business to Cyrus II through a policy attaching quota share reinsurance treaty.

The quota share is significantly less than the previous Cyrus vehicle – the first sidecar to be launched after 2005’s Hurricane Katrina - which had a cession percentage of between 35 percent and 50 percent of premium of XL Re’s property catastrophe business to Cyrus Re.

The sidecar was originally set up late in 2005 in the wake of XL’s heavy losses from hurricanes Katrina, Rita and Wilma and was capitalised at $525mn.

But with an outlook of softening rates, it appears the Bermudian (re)insurer has decided to significantly scale back the vehicle.

Almost $1bn of sidecar capacity has already run-off to date in 2007, and market commentators are reluctant to predict how much of the estimated $5bn that remains will renew in the final quarter.

Sidecars up for renewal include Harbor Point’s $250mn retro vehicle New Point Re, Hiscox’s US catastrophe quota share vehicle Panther Re, Validus’ energy-specific sidecar Petrel Re and Brit’s $107mn natural perils retro sidecar Norton Re.

Hiscox recently confirmed it would not be renewing Panther Re but is instead looking to launch a Names-backed Lloyd’s Syndicate 6104 sidecar.

Rating agency Standard & Poor’s (S&P) has assigned ratings to Cyrus’ loans of BB+, for senior debt of $65mn, B for senior subordinated debt of $20mn and B- for the junior subordinated debt of $20mn.

S&P credit analyst Mark Davidson said:  “The different ratings reflect differences in the modelled probability of the tranches attaching and the application of a cushion to consider the possibility of modelling error and other risks.”

Davidson added: “The cushion is a critical element to our rating process for sidecars and other forms of indemnified property catastrophe risk. The cushion equals the percentage difference between the catastrophe losses associated with the modelled probability of default and the catastrophe losses at the point on Cyrus II’s aggregate exceedance probability curve that correspond to the maximum adjusted probability of default that S&P allows for the assigned rating.”

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