Validus Re, one of the Island?s newest reinsurers, has reduced its potential exposure to losses from high-risk policies through a reinsurance agreement with new sidecar facility Petrel Re.

As a sidecar, Petrel, incorporated on April 24, will provide reinsurance solely to Validus, a $1 billion global reinsurer formed in the wake of last year?s Hurricane Katrina.

Validus was one of ten major insurers to incorporate on Bermuda in late 2005 to take advantage of an expected rise in premium pricing on the heels of Katrina and other deadly hurricanes leaving the sector with a bill as high as $80 billion.

Energy and marine policies are seeing some of the steepest increases, after oil and gas facilities in the US Gulf Coast were badly damaged by Katrina and later storm, Hurricane Rita. The cost of insuring these facilities in 2006 has risen by up to 400 percent, experts estimate.

While energy and marine pricing is strong, there is also a high risk of loss if another severe hurricane hits the Gulf Coast area. Chief executive Ed Noonan said, in a telephone interview yesterday, that the $200 million Petrel facility will provide reinsurance protection for three-quarters of some of the marine and offshore energy reinsurance policies Validus sells. ?What that really means is we will keep 25 percent of the risk and cede (or pass on) 75 percent? to Petrel,? he said.

Petrel?s underwriting activities will be overseen by Paul Manders and Paul Roberts, who are responsible for Validus? global marine and energy division. Backing for the fledgling reinsurer ? named for Bermuda?s endangered, endemic bird, the Bermuda Petrel or Cahow ? is being provided by First Reserve Corporation, a Greenwich, Connecticut-based private equity firm that has invested exclusively in the energy sector for more than two decades. Under the agreement with Validus, which runs through 2007, Petrel will be paid a premium equal to a percentage of what Validus charges on the initial reinsurance contract. In turn, Validus will earn a ceding commission and fee income on the business it passes on to Petrel. The agreement is fully collateralised.

While the agreement currently covers energy and marine policies, Validus hasn?t ruled out extending its future business with Petrel to include other reinsurance lines.

Validus? business plan focuses on short-tail policies, or contracts that are generally settled within a few years. Besides marine and energy, it sells property catastrophe, aviation, retrocession and other specialty reinsurance contracts.

As a reinsurer, Validus provides coverage to insurers looking to spread the risk in policies sold to individuals and corporations. And by providing reinsurance protection to Validus, Petrel is , in industry parlance, a retrocessional provider, or a reinsurer of another reinsurer.

Petrel is at least the seventh Bermuda sidecar reinsurer to be formed since Hurricane Katrina. Sidecars are effectively piggyback facilities that allow larger reinsurers to continue writing high-risk policies while reducing balance sheet volatility because the business is effectively being passed on to a separate entity.

Investors, who have poured some $2.5 billion into these structures in recent months, have the benefit of being able to put money into the market when prices are rising while also being able to readily withdraw from the low-infrastructure companies as the market softens. Most of the post-Katrina sidecars, including Petrel Re, won?t seek credit ratings, a prerequisite for reinsurers selling policies to a wider range of customers.