The number of sidecars and other special purpose vehicles (SPVs) in which Bermuda insurers and reinsurers have an interest ? as investors, cedants, borrowers or advisors ? has risen to at least 15.

More than a dozen others have been formed by European and American companies, the latest of which, announced last week, is Thunderbird Re, Lloyd?s of London?s first sidecar.

The main purpose of the new vehicles is to provide reinsurance cover and, for reinsurers, retrocession, which is the industry name for reinsurance for reinsurers.

The sidecar may be partially-owned by the ceding reinsurer, or it may not. The sidecar pays fees to the ceding reinsurer for the business it is fed.

This gives the ceding reinsurer two advantages: a better-looking balance sheet, with some of its risk booked elsewhere, and a better-looking income statement, with fee income from the sidecar and its earnings not consolidated.

The other main use for sidecars has been the securitisation of risk, described by some as ?pre-event funding?.

By accumulating capital in an SPV that will be paid out when losses hit a certain trigger level, the ceding reinsurer improves the quality of its book, overall, while retaining the risks it has written.

Given the apparent efficiency of these corporate vehicles and the sometimes herd-like mentality of insurance executives, more of these SPVs will likely be formed before too long.

Just about every sidecar is different in some way from every other one, but they share certain characteristics.

Almost all have been formed to shift a percentage of risk, often peak risk, from their sponsors? balance sheets.

In the face of demands from the rating agencies, after the storms of 2004 and 2005, for more capital per dollar of premium written, companies have been forced to come up with innovative ways of achieving an improved capital profile.

Almost all these new companies are owned, in part or altogether, by hedge fund managers or their clients. Many of the new SPVs have a limited lifespan, which has led to them being tagged ?disposable reinsurers? in some quarters.

?For the hedge fund managers, some of these companies represent a short-term bet,? said the chief executive officer of a large Bermuda company, who asked not to be identified since, he said, ?my stripped-down views on this subject are a little close to the knuckle?.

He continued: ?If the sidecar has a good year, you take your profit by way of a dividend and let the original capital ride. A second good year, and you?re out, with profit and capital intact. You?re golden.?

And if the 2006 hurricane season is as punishing, economically, as the previous two? ?Then you lose the bet, and have to decide whether to place a new bet for 2007,? the executive said.

A.M. Best says: ?The tightening of reinsurance capacity in the property/casualty market has made the use of sidecars an attractive alternative to traditional retrocession. The sidecar is the offspring both of investors looking for risk with potentially high returns and of reinsurers/insurers strapped for capital after the catastrophe losses. Although sidecars have been used mainly for property and marine catastrophe reinsurance, they also have been created for life reinsurance.?

There have been several precedents for these vehicles. Olympus Re is now regarded as the first sidecar of the modern age.

The company was formed in Bermuda to write treaty reinsurance for White Mountains Group, but was severely damaged and almost put out of business in 2005.

In 2002 and 2003, Lloyd?s formed a number of quota share treaty reinsurance deals, at a time when many of the Lloyd?s elements were keen to attract greater capital to exploit the post-9/11 trading conditions.

A group of joint ventures, established in the past six years and operated by RenaissanceRe, might now be recognised as early sidecars, although the metaphor does not exactly fit these operations.

Alongside its core business, the company has for some years operated separate pools-Top Layer Re, Op Cat and DaVinci Re among them.

The criteria RenaissanceRe applied to all business fed into its joint ventures was they had to meet or exceed the standards that RenaissanceRe had set for its own acceptances.

Their backers were not hedge funds; their existence was not limited; and RenaissanceRe had a direct interest in the companies.

Nonetheless, they operated alongside RenaissanceRe, and would have been called sidecars if other reinsurers had started similar ventures.

From a balance sheet and income statement, a sidecar is a win-win proposition. Unless, of course, the 2006 hurricane season, as yet relatively incident-free, turns into a third year of epic financial losses.

Should that happen, sidecars would likely go out of fashion and a new mechanism would have to be developed. Sidecars are therefore one more reason why the reinsurance industry will be waiting, almost until Christmas, to exhale.