XL Capital, a global Bermuda-based insurer under pressure to reduce volatility after a string of losses, said it is working with advisors on finalising a capital raising plan.

It also plans to increase its ability to sell 2006 policies by laying off some of the risks in property-catastrophe and retrocessional policies it sells through a quota-share agreement with a new Bermuda reinsurer, Cyrus Re.

Retrocessional policies are contracts that reinsurers buy to offset their own exposure to losses from policies sold to other insurers.reported on Thursday that the lead investor in the new $500 million Cyrus is Boston-based Highfields Capital Management, a company that runs a number of funds with combined investments from institutions reaching into the billions of dollars.

XL?s capital raising announcement, and further information on its arrangement with Cyrus, came on the heels of a late Wednesday announcement that XL expects to post a $830 million fourth-quarter loss, on top of a $1.05 billion loss in the third quarter.

The latest loss is anticipated after XL learned an actuarial decision on its Winterthur reserves is likely to go against it.

XL had been holding out for a $1.45 billion payout from Credit Suisse, which sold it the property-casualty business of Swiss insuerer Winterthur in 2001. But now it stands to only get in the region of $575 million, meaning it will have to pour millions of dollars more into a reserve fund to cover claims from prior-year policies it acquired under the Winterthur purchase.

XL chief executive Brian O?Hara said on Friday the company will raise capital ?to restore the strength of our balance sheet?.

Details of the capital raising have not been announced but XL indicated it would its plan ?will have significant equity content?.

XL also plans free up capital, and thereby extend its ability to sell more policies during the pivotal January 1 renewal period, through the quota-share agreement with Cyrus.

XL and other insurers, including a wave of at least 11 new major reinsurers currently forming in the Bermuda market, are gearing up for an expected rise of 40 percent or more in insurance rates after the sector was hit by a record wave of losses from Hurricane Katrina and other third-quarter storms.

XL said it was not taking a direct ownership stake in Cyrus, which will ensure it is an independent entity. Otherwise the two companies could be deemed affiliates, and XL would not be able to account for the business as reinsurance.

XL has held an equity stake in Highfields itself since 1999.

Under the arrangement with Cyrus, XL will be able to spread some of the risks in insurance and reinsurance policies it sells to corporations.

Quota-share agreements generally carry multiple benefits for the cedant ? an industry term that indicates an insurer or reinsurer who contracts to buy reinsurance from a third party.

The net effect is that XL will reduce its exposure to losses, and also free up some of its existing capital to sell more policies.

It may also be able to earn fee income on the reinsurance it buys under the agreement.

A certain level of capital must be held by insurers, under regulatory requirements, to ensure there is enough money to pay claims that develop on policies already sold.

A search of the Cyrus company file lodged with the Bermuda Registrar of Companies last Wednesday showed the new reinsurer?s official address is the IAS Building on Church Street.

It is understood that no Cyrus personnel are working from this address but IAS does provide management services for the new reinsurer.

Some of Bermuda?s other new reinsurers, including Validus, Amlin, Hiscox and Lancashire have also hired IAS to provide management services, and the latter three have leased short-term space in the building for staff to work. Cyrus, a class three company ? meaning it has to maintain capital of at least $1 million under Bermuda insurance regulations ? was licensed to do business in late October.

With $500 million in initial capital Cyrus could qualify as a Class 4 Bermuda insurer ? the licence handed to those with $100 million or more in capital, although most are capitalised with at least $500 million, and most have capital exceeding $1 billion. XL, for example, as one of the Island?s bigger insurers, has in the region of $7 billion in shareholders? equity.

Cyrus may have been formed as a class three insurer because of being designed to principally work with one customer, XL.

This kind of set-up ? a reinsurer designed to sell policies to one customer but with the backing of outside investors ? is commonly referred to as a ?side-car? venture.

Other Bermuda companies have set up similar arrangements, Montpelier Re recently formed Blue Ocean, a Class 3 company, and earlier in the year it and West End Capital led the formation of another similar vehicle in the Cayman Islands, Rockridge Re.

And in 2001 White Mountains formed Olympus Re, which had initial capital of $500 million, to offer reinsurance under a quota-share agreement to some of its reinsurance units.

Side-cars are generally formed when there are signs that reinsurance and insurance rates are going to rise, as is expected now.

Insurance companies that have side-car arrangements can use the companies to enable greater sales, which is especially attractive when policy prices rise.