Bermuda insurance officials have handed out at least ten class four licences ? reserved for highly-capitalised insurance and reinsurance companies ? to a wave of companies rushing to establish themselves in the Bermuda market ahead of what is expected to be an especially lucrative selling period.

And the identity of the lead investor forming a reinsurer to provide coverage to XL Capital emerged as Boston-based hedge fund manager Highfields Capital Management.

XL said on November 1 it would be seeking greater reinsurance protection through a quota-share agreement with the newly formed company after it was hit by a net loss of $1.05 billion in the third quarter. (see separate story).

The latest flock of insurers ? with the Island having seen successive waves of incorporation activity following costly catastrophes ? is forming after widespread expectations that insurance and reinsurance rates will rise when most contracts come up for renewal on January 1.

The industry expects prices to rise because it needs to recoup some of its losses after an estimated $75 billion in claims so far this year, primarily because of heavy Atlantic storm activity. The industry's potential losses were pushed to record highs by Hurricane Katrina's onslaught of the Gulf Coast region on August 29. Katrina alone could dent insurance balance sheets by up to $60 billion.

A tightening market is also expected because scientists have said weather patterns are changing and storms could be more frequent, severe and make landfall more often. Under that scenario, insurers and reinsurers need to charge more for policies that can see claims triggered by storm events ? particularly property-catastrophe, marine and energy. Other types of policies are also expected to see rate increases.

The new companies gearing up to enter the market have combined capital of at least $8.5 billion, which is in addition to billions of dollars also being tapped from the capital markets by established insurers.

The capital raising by established companies has helped replenish capital drained away by the third-quarter storm losses, as well as to boost capital in time for the expected turn in market conditions.

Under regulatory requirements, insurers must hold a certain amount of capital in order to sell policies ? a measure designed to ensure there is enough money to meet possible claims.

While established insurers have accessed new capital through the traditional capital markets route, the money flowing into the new start-up companies is coming largely from private equity firms, hedge funds and in several cases, from already established London-based insurance companies. Several UK corporations are lining up to join the Bermuda market because of the Island's proximity to the lucrative US market, as well as for its rapidly expanding reinsurance market that saw policy sales exceed London's last year.

And more capital is also known to be flowing into the industry to back, smaller ventures set up to provide additional capacity for established insurers and reinsurers.

These so-called 'side-car' companies are being set up in a way that is understood to allow established public insurers to tap private pools of money, but without the hassle of the shareholder disclosures that would be required if the investment was made directly in the company. And as a separate, private entity, the investments also won't dilute shareholder value.

Andy Barile, a reinsurance consultant who three decades ago co-founded the first Bermuda reinsurer to go public, said the side-car concept may seem new but it amounts to little more than a "sophisticated retrocessionaire". Retrocessional reinsurers sell insurance to reinsurers, and in this case are likely to offer reinsurance protection to the companies that established them.

This type of arrangement can give the company being reinsured, called the ceding company in industry parlance, additional underwriting capacity without it becoming necessary to make a corresponding increase in capital.

And while reinsurance between related entities wouldn't normally pass risk transfer tests, the side-car policies may pass muster, Mr. Barile said, because backing likely comes largely from unrelated entities.

Although few details on the side-car companies have yet been made public, Montpelier Re is known to be one of the companies establishing this kind of structure.

Montpelier was one of the most severely hit by the 2005 storm season with a recorded net loss of $875.1 million in the third quarter, forcing the company to raise significant capital.

Blue Ocean Reinsurance was licensed as a class three Bermuda reinsurer in late October, and is based at Montpelier's Mintflower Place, Par-la-Ville address, company records lodged with the Registrar of Companies showed.

A Montpelier spokesperson yesterday said the company could not give further details at this time on Blue Ocean, including its capitalisation or specifics of its structure.

Under Bermuda regulations, class three reinsurers have to maintain capital of at least $1 million while class four companies must have a minimum capitalisation of $100 million. Most of the new companies far exceed these levels, with capital levels rising, in some cases, to $1.5 billion.

Rating agency pressures, the de facto regulators of the industry, are requiring property-casualty companies to have and hold on to more capital after storm losses wiped away up to 60 percent of some insurers capital. While none of the rating agencies have made an across the board determination on how much capital each company should have in hand, $1 billion is understood to be the new industry minimum standard, for serious participants.

In addition to a scramble for capital, companies are actively competing for staff. Reports are that the new companies' warp-speed need to recruit underwriters, actuaries and modellers is straining an already limited talent pool.