Bermuda-based global insurer XL Capital plans to lower its chance of ever again sustaining the $1 billion losses it posted in the third quarter by buying reinsurance from a new company being formed by an investment firm it has a long association with, and holds an equity stake in.

Several market sources told The Royal Gazette that Boston-based Highfields Capital Management, a company that runs a number of funds with combined investments from institutions of around $6.5 billion, is establishing the new reinsurer. While XL is not to have a direct ownership stake in the new venture, it will benefit by inking a quota-share reinsurance agreement with it.

XL spokesman Roger Scotton declined to comment on the matter, and Highfields also did not by Press time return a request for more information, made through a PR firm that represents it.

Under the quota-share arrangement, XL will be able to cede, or pass on, some of the risks in property catastrophe and retrocessional policies it has sold. Retrocessional policies are contracts that reinsurers buy to offset their own exposure to losses from policies sold to other insurers.

Highfields agreement with XL expands the hedge fund company's track record of insurance investments. Earlier this year it made an investment in newly formed insurance brokerage Integro. Integro was formed by former Marsh & McLennan executive Robert Clements. Mr. Clements was instrumental in the formation of several of Bermuda's largest reinsurers, including XL.

It is also not the first time Highfields has formed a reinsurer, having established Irish Reinsurance Partners Ltd. in 2001 to reinsure the non-life contracts of French reinsurer Scor. The Paris-based company bought out Highfields stake in Irish earlier this year.

XL on November 1 said the new reinsurer was to be funded with $500 million to $1 billion and would be owned by a group of institutional investors understood to be led by Highfields.

XL said earlier that this arrangement "will reinforce XL's leadership position in these lines of business, reduce our volatility, provide incremental earnings, and therefore maximise our shareholders' risk adjusted return".

XL took an equity stake in Highfields Capital in 1999. The insurance group is also invested in at least seven other alternative investment companies.