Calm before the storm: Florida's insurance travails are at the eye of the new hurricane season.

* The Big Picture: A tight market for capital already has placed pressure on reinsurers' capacity and ability to reload after disasters.

* What Happened: 2008 was the fourth-costliest year for insured catastrophe losses in the past 10 years.

* What's Next: As Florida struggles with its property/casualty market, many forecasters expect another active hurricane season.

The best gauge of volatility in the upcoming hurricane season may have less to do with an El Nino or La Nina weather pattern and more with the economy.

The tightening of capital on weakened investments, and heavy catastrophe-related losses that were up threefold in 2008, have formed their own pressure system on preseason balance sheets.

Further clouding the outlook for reinsurers was the uncertainty dogging the Florida Hurricane Catastrophe Fund. Florida lawmakers wrestled with several ways to reduce a cat-fund shortfall estimated at $13 billion in mid-April--roughly six weeks from the June l start of hurricane season.

According to Aon Benfield, April 1 renewals for U.S. insurers with East Coast hurricane exposure exceeded those for Jan. 1, though the amount of renewals was not considered a significant portion. Some carriers with later renewal dates tried to move ahead of June or July renewal season in anticipation of a capacity issue, according to an Aon Benfield report.

Bryon Ehrhart, chief executive of Aon Benfield Analytics, said he believes many companies that acquire reinsurance through the Florida cat fund's $12 billion Temporary Increase in Coverage Limit layer couldn't afford it otherwise at their current rate levels. He felt demand for private market reinsurance in Florida was being stifled by what he viewed as the state's inclination to largely hold steady on the TICL capacity and lobby for federal funding.

Another Way

In early May, the Florida Legislature passed a bill to phase out $12 billion of liability from its cat fund over a six-year period. Shortly after its passage, Gov. Charlie Christ indicated he would sign the bill into law.

Ehrhart said reinsurers' capital had dropped an average of 19%, leaving them more sensitive to incremental volatility. He said while many reinsurers will offer stable renewal capacity, "you can see some programs where the capacity is down as much as 15%."

An A.M. Best Special Report on the global reinsurance market issued April 27 indicated that U.S., Bermuda and large international reinsurance companies had lost 15% of capacity in 2008 when measured in terms of shareholder equity. But any impact would be offset by two strong operating years in 2006 and 2007, improved loss reserves and capital increases that followed Hurricane Katrina, according to the report.

A reinsurance market update released by Lockton Cos. in mid-April projected a 20% increase in North America's rates for April and June renewals. That same report predicted less pressure on rates for regional covers, unless there were wind exposure or prior losses from Hurricane Ike.

Paddy Jago, chief executive officer of Willis Re, said there's been no incoming class of reinsurers, such as in 2002 or 2006, due to a lack of available capital. He doesn't detect substantial decreases in reinsurer capacity, but hasn't seen meaningful increases, either.

Jago said that reinsurers will look to preserve capital in 2009 and 2010 because they "may not be able to reload as they have in the past."

Willis Re's reinsurance market outlook, released in late March, cited a continued lack of critical catastrophe capacity, especially for accounts with Southeast and Gulf of Mexico wind exposure. The report also noted that Florida renewals headed to the market early, but that it was too soon to establish pricing trends.

An A.M. Best Special Report on the property/casualty segment indicated that catastrophe-exposed property reinsurers notched double-digit premium increases during the January 2009 renewal season. The hikes came on the heels of the fourth-costliest year /or catastrophe losses in the past decade, during which the U.S. reinsurance segment's combined ratio increased by 6.3 points to 99.9, according to A.M. Best.

Looking Ahead

Meanwhile, Colorado State University's hurricane forecast team in April scaled back its initial 2009 forecast and now predicts 12 named storms will occur in the Atlantic basin, six of them hurricanes. Two hurricanes will be Category 3 or higher, with sustained winds of at least 111 mph, according to CSU. The forecast placed the probability of a major hurricane making landfall on the U.S. coastline at 54%, two percentage points higher than the average for the past century.

WSI, a provider of weather-driven business solutions, also scaled back its forecast in April. The Andover, Mass.-based firm now predicts 11 named storms and six hurricanes, with two being at least Category 3. That's down from an earlier forecast of 13 named storms and seven hurricanes, with three of those being Category 3 or higher.

Andrew Castaldi, senior vice president at Swiss Re and head of catastrophe perils for the Americas, believes it's too early to place stock in forecasts.

He cautioned that even a less-than-average year can be devastating, such as 1992 when Hurricane Andrew caused $25.6 billion in insured losses (adjusted in 2008 dollars) in a season with just six named storms. Of those, only one other, a weak tropical storm, managed a landfall.

Castaldi said a trend he's noted is that landfalling hurricanes, such as last year's Category 2 Hurricane Ike, are causing more damage than was expected even two years ago. Ike struck Galveston last September and spun inland, becoming the fourth-costliest hurricane in U.S. history with nearly $20 billion in insured losses, according to A.M. Best data. Beyond Texas and Louisiana, losses also were incurred in Arkansas, Illinois, Indiana, Ohio, Pennsylvania mad other states.

"The average loss from any landfalling storm that hits an area of population seems to be on the rise," Castaldi said. "But that's not only storm-related. That's more exposure-and vulnerability-related."

Storm-related costs for 2009 started piling up early. In April, tornados, severe thunderstorms and hail struck Alabama and Tennessee. Georgia has estimated it incurred nearly $60 million in insured losses from several days of bad weather triggered on April 10.

Fund Plans

As the '09 hurricane season plods along, Florida likely will face renewed economic pressure due to the relationship between its cat fund and the state-owned Citizens Property Insurance Corp. The 1.03-million Citizens policies in force as of March 31 generated 27% of the state's residential premium, according to its Web site.

Acknowledging in March that the cat fund faced a projected $18.5 billion shortfall, Florida's Chief Financial Officer, Alex Sink, told the state legislature that Citizens' premium rates may be under-priced by 40%.

A month later, cat fund officials were told it would cost roughly $275 million to acquire $1 billion of reinsurance in the private market, based on the collective judgment of the cat fund's financial advisers. That group includes Aon Benfield, U.S. Re Corp. and Guy Carpenter.

Actual quotes weren't sought, out of concern that doing so might disrupt the market for other Florida insurers, according to an April 10 memo that the investment counseling firm Raymond James submitted to state officials.

Castaldi said Swiss Re had ongoing discussions with Florida regarding possible private-market solutions for the state's cat fund.

The industry remains wary of government-based insurance pools that subsidize selected risks, such as windstorm coverage, with premiums that are subject to political pressure and are therefore vulnerable to underpricing.

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"We could see a losing proposition because somebody eventually is going to have to pay for the losses," Castaldi said. "We really have to support the private market and risk-based pricing. If the exposure or hazard is there, then the consumer who decides to build in such high-risk areas should pay a higher premium for it."

Jago said there was no easy solution for Florida given the state's inclination to keep consumers' premium rates at a suppressed level. He said the uncertainty surrounding the cat fund's finances made it difficult to accurately assess the reinsurance market's capacity ahead of June 1 renewals.

He suggested the possibility of removing Citizens from the cat fund's fold, which would let the state deal with the viability of its two insurance/reinsurance entities on a separate basis.

"As I see it now, it's propping up something that won't work with something else that won't work."

He said separating the two state-run entities would allow the cat fund to remain as a viable, less expensive alternative to private market reinsurance. This would allow primary insurers accessing the cat fund to pass any savings to consumers in the form of reduced premiums. Florida officials could then contend with Citizens' fiscal health on a stand-alone basis, although he wasn't sure of the best remedy for Citizens itself.

"As long as the ballot box controls the state's motives, this is a circle that's never going to be squared," Jago said.

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Learn More

Swiss Re Group

A.M. Best Company # 85010

Distribution: Reinsurance brokers

Travelers Group

A.M. Best Company # 18674

Distribution: Independent agencies and brokers, affinity group marketing and the Internet

For ratings and other financial strength information visit www.ambest.com.

Watch a video about this article on bestreview.com/videos

Travelers' Zone Coverage

One idea gaining traction as a way to offset escalating catastrophe losses got its start as an op-ed piece in the Aug. 27, 2007, edition of The Wall Street Journal. Authored by Travelers Cos. Chairman and CEO Jay Fishman, the article proposed the creation of a coastal zone from Texas to Maine, where federal officials "would regulate and oversee most aspects of wind underwriting by private insurers, including pricing." (According to AIR Worldwide, there is an estimated $9 trillion worth of coastal property value between Texas and Maine, with $2 trillion of that in Florida.)

Fishman's concept has evolved into Travelers' Coastal Hurricane Wind Zone Plan. The entire state of Florida would be its own zone, and the remaining coastline would be cleaved into three other zones. Coastal and low-lying inland areas in these zones would fall under the plan's auspices.

The plan would give a federal board oversight of named storm coverage, while the states would continue regulating the balance of the homeowners' insurance market. The federal board would also approve standards for actuarial rates and certify wind-risk models, thus providing regulatory stability.

Primary insurers underwriting named windstorm coverage in the four zones would acquire reinsurance through the federal board without any subsidy from taxpayers or noncoastal homeowners.

Risk models certified by a federal board for use by carriers also would be utilized to develop the price for federal reinsurance. The plan's premium would include something to pay expenses for the federal government's oversight.

The plan has garnered support from Nationwide Mutual Insurance Co.; the Independent Insurance Agents & Brokers of America; the Council of Insurance Agents and Brokers and some members of Congress.

Coastal Issue

Travelers' Coastal Hurricane Wind Zone Plan would establish four zones ranging from Texas to Maine, with Florida standing on its own. The approach would create a market-based insurance system for named windstorm coverage that would trigger on extreme events. While the approach would include a federal role, it would not involve a taxpayer subsidy.

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Hurricane Havoc

It's the beginning of U.S. hurricane season. Here's a look at three states vulnerable to hurricanes and a summary of each state's insurance market.

Texas

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Top Writers--2008
Homeowners Multiperil
Direct Premiums Written

State Farm Group          $1.5 billion
Allstate Insurance Group   751 million
Farmers Insurance Group    701 million
USAA Group                 404 million
Travelers Group            275 million

Source: BestLink

Costliest Texas Storms
1950--Present ($ Billions)

Insured    Storm                    Date             Landfall
Losses

* $10.00   Hurricane Ike            Sept. 13, 2008   Galveston
   $4.32   Tropical Storm Allison   June 8, 2001     Freeport
   $3.14   Hurricane Rita           Sept. 24, 2005   TX-LA border
   $2.33   Hurricane Carla          Sept. 11, 1961   Port O'Connor
   $1.75   Hurricane Celia          Aug. 3, 1970     Corpus Christi

* Estimated at this time.

Figures were compiled by the Insurance Council of Texas and
verified by the Property Claim Services of the Insurance
Services and the National Oceanic and Atmospheric Administration.

Source: Insurance Council of Texas

Adjusted Loss Ratio

Homeowners Insurers

Florida

2003     58.76
2004     28.40
2005     56.98
2006     33.96
2007     36.57

Source: BestLink

Note: Table made from bar graph.

TWIA * Boom

Policies in State Fund
Business and Residential

(No. of Policies)

Jan 1     215,537
Jan 31    226,415
Feb 28    227,030

* Texas Windstorm Insurance Association

Source: Southwestern Insurance
Information Service/Texas Windstorm
Insurance Association

Note: Table made from bar graph.

Coastal Exposure

Insured Property Values

($ Billions)

2004      255
2007      895

Source: Insurance Information
Institute

Note: Table made from bar graph.

TWIA * Exposure

Does not include ALE
and Loss of Use

($ Billions)

Jan 1      58.6
Jan 31     62.1
Feb 28     65.5

* Texas Windstorm Insurance Association

Source: Southwestern Insurance
Information Service/Texas Windstorm
Insurance Association

Note: Table made from bar graph.

Louisiana

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Property Values
Total value of insured coastal
property, 2007

                 ($ Billions)

Florida              $2,458.6
New York             $2,378.9
Texas                   895.1
Massachusetts           772.8
New Jersey              635.5
Connecticut             479.9
Louisiana               224.4
South Carolina          191.9
Virginia                158.8
Maine                   146.9
North Carolina          132.8
Alabama                  92.5
Georgia                  85.6
Delaware                 60.6
New Hampshire            55.7
Mississippi              51.8
Rhode Island             54.1
Maryland                 14.9

Source: AIR Worldwide

Top Writers--2008
Homeowners Multiperil

Direct Premiums Written ($ Millions)

State Farm Group               $388.5
Allstate Insurance Group        213.2
Southern Farm Bureau Group       91.6
Farmers Insurance Group          80.6
Liberty Mutual Insurance Cos.    80.0

Costliest Louisiana Storms

Year   Storm                    Landfall             Insured Losses

2005   Hurricane Katrina        Plaquemines Parish   $25.4 billion
2005   Hurricane Rita           LA--TX border        3.4 billion
2008   Hurricane Gustav         Cocodrie             2 billion
1992   Hurricane Andrew         Morgan City          500 million
1965   Hurricane Betsy          Grand Isle           479 million
2002   Hurricane Lili           Intracoastal City    415 million
2000   Winter Storm             --                   355 million
2008   Hurricane Ike            Galveston, TX        130 million
2002   Tropical Storm Isidore   Grand Isle           105 million
1989   Severe Weather           --                   85 million

Source: Gary Kerney, assistant vice president of Property
Claim Services at ISO

Adjusted Loss Ratio

Homeowners Multiperil

2004     34.14
2005    834.03
2006      1.73
2007     32.13
2008    161.33

Source: BestLink

Note: Table made from bar graph.

Florida

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By the Numbers: Florida & Hurricanes

* Hurricanes are more likely to hit Florida than any other U.S. state.

* Eight of the 10 most expensive hurricanes ever to make landfall in U.S. history hit Florida, causing more than $60 billion in insured losses (Hurricane Andrew in 1992; Charley, Frances, Ivan and Jeanne in 2004; and Katrina, Rita and Wilma in 2005).

* 37% of all hurricane landfalls occur in Florida; 38% of those are Category 3 or higher.

* At least one hurricane strikes Florida every two years, on average, since 1900; a Category 3 or stronger storm strikes the state every four years, on average.

* 22% of all U.S. catastrophe losses since 1980 occurred in Florida.

Source: Insurance Information Institute

Top Writers--2008
Homeowners Multiperil

Direct Premiums                     ($ Millions)

State Farm Group                        1.13
Citizens Property Insurance Corp        1.04
Universal P&C Insurance Co.              .46
USAA Group                               .32
Tower Hill Group                         .28

Source: BestLink

Costliest Florida Storms

                                               * Insured Losses
Year   Storm               Landfall            (in 2007 dollars)

1992   Hurricane Andrew    Homestead              $22.2 billion
2005   Hurricane Wilma     Cape Romano            $10.9 billion
2004   Hurricane Charley   Cayo Costa              $8.2 billion
2004   Hurricane Ivan      Gulf Shores, Ala.       $4.7 billion
2004   Hurricane Frances   Sewell's Point          $4.7 billion
2004   Hurricane Jeanne    Stuart                  $3.3 billion
1995   Hurricane Opal      Santa Rosa              $1.9 billion
2005   Hurricane Dennis    Navarre Beach         $907.7 million
2005   Hurricane Katrina   Golden Beach          $576.5 million
1995   Hurricane Erin      Vero Beach            $476.2 million

* Florida losses only

Sources: Insurance Information Institute; National Hurricane Center

Adjusted Loss Ratio

Homeowners Multiperil

2004     279.07
2005     136.48
2006      32.10
2007      26.42
2008      35.78

Source: BestLink

Note: Table made from bar graph.

Market Share

Homeowners Multiperil

Domestic insurers                        39%
Foreign insurers                         24%
State Farm Florida                       19%
Citizens Property Insurance Corp.        18%

NOTE: State Farm
Florida has filled a
plan to withdraw
from the state
property insurance
market.

Source: Office of Insurance Regulation

Note: Table made from pie chart.

Reinsurance Option

The Financial Services Team advising Florida's
Hurricane Catastrophe Fund provided the following
estimates on traditional reinsurance pricing
on April 10, 2009.

Traditional Reinsurance Pricing and Capacity

                Rate      Cost to
Ceded Amount   on Line   FHCF (000)

$1 Billion     27.5%       $275,000
$2 Billion     30.0%       $600,000
$3 Billion     32.0%       $960,000
$4 Billion     34.0%     $1,360,000
$5 Billion     35.0%     $1,750,000

Note: The scenario assumes an attachment point at
$10.5 billion in FHCF losses. The rates were not
based on actual quotes because the Financial
Services Team thought doing so might disrupt the
market for other Florida insurers.

Sources: Raymond James; Florida Hurricane
Catastrophe Fund

Outlook for June and July Renewals
Here's a breakdown of June and July renewals for the
United States markets:

                   Rate on Line   Capacity         Retention
                   Changes        Changes          Changes

Personal
Lines National     +5 to +25%     Stable to -15%   +10 to +15%

Personal           -5 to +30%     Stable to -10%    +5 to +15%
Lines Regional

Standard
lines Commercial   +5 to +25%     Stable to -10%   +10 to +25%

Complex
Commercial Lines   +10 to +25%    Stable to -15%   +10 to +25%

Source: Aon Benfield Reinsurance Market
Outlook--March 31, 2009

Florida Personal Residential Premiums Written
Market share, as of Sept. 30, 2008

Citizens Property Insurance Corp.                   22%
State Farm Florida Insurance Co.                    14%
Universal Property & Casualty Insurance Co.          6%
St. Johns Insurance Co.                              3%
Royal Palm Insurance Co.                             2%
United Services Automobile Assoc.                    2%
Liberty Mutual Fire Insurance Co.                    2%
Homewise Preferred Insurance Co.                     2%
Florida Peninsula Insurance Co.                      2%
Allstate Floridian Insurance Co.                     2%
All Other Carriers

Florida Commercial Residential Premiums Written
Market share, as of Sept. 30, 2008

Citizens Property Insurance Corp.                   62%
QBE Insurance Corp.                                 17%
American Coastal Insurance Corp.                     9%
American Capital Assurance Corp.                     5%
American Strategic Insurance Corp.                   1%
Service Insurance Co.                                1%
Nova Casualty Co.                                    1%
Philadelphia Indemnity Insurance Co.                 1%
All Other Carriers                                   3%

Source: Florida Office of Insurance Regulation, Quarterly
Supplemental Report (QUASR). Includes licensed carriers only.
Surplus lines companies are not included in the market share
calculation.

Note: Table made from pie chart.