For the June reinsurance renewal season, all eyes focused on theFlorida market amid grandiose fears of possible dislocation in thesecondary market as a result of the state's controversialcatastrophe fund expansion.

So far, the private reinsurance market is still a thriving forcein Florida, braced for the hurricane season as fears about thestate fund's capacity to protect carriers kept reinsurers fromputting all their eggs in the Sunshine State's basket.

Paul Karon, chief executive officer of Benfield Inc., said theplan of Florida regulators and lawmakers was to place $12 billionof subsidized reinsurance capacity into play, with "the quid proquo being that insurers were supposed to take those savings fromthe open market and pass them on to consumers."

Mr. Karon said that, due to several factors--including StateFarm's purchase of coverage from its parent--"in reality, there wasonly $6 billion that was dislocated."

And within that $6 billion, carriers bought more reinsurance ontop of the Temporary Increase in Coverage Limit--the recentlylegislated optional coverage that sits above the Florida HurricaneCatastrophe Fund.

"The carriers also had to purchase back-up cover," he said."Since the cat fund does not reinstate if there is a loss, carriersneeded to buy a second limit in the private market to protect theirratings and solvency."

Thus, those two purchases tightened the market more than firstenvisioned when the legislature passed its reforms in January.

"So, while we might have thought the rates would come down 10percent to 20 percent, they probably came down 10 percent to 15percent," Mr. Karon noted.

Thus, the question now remains for state lawmakers andregulators: Did the state get the rate relief concomitant with theliability it took on.

When companies first filed their proposed rates taking intoaccount the savings from the cat fund expansion, there wasinitially some disappointment that reductions did not reach the 24percent level that was talked about when lawmakers passed thereforms.

Jonathon Kees, a representative for the Florida Office ofInsurance Regulation, said that so far reductions approved haveaveraged 19 percent throughout the state.

But carriers predicated their request and regulators approvedthem based on initial projections of cost savings, while the finaltale will be told in September--when companies will factor in theiractual reinsurance costs.

"Our actuaries will ensure that the reinsurance purchases arenot only adequate but not excessive, in terms of what can be passedto policyholders," he said, adding that duplicative reinsurancecoverage will not be passed through.

Brad Kading, president of the Association of Bermuda Insurersand Reinsurers, said primary companies did buy reinsurance out offear that the cat fund might be depleted.

State Rep. Don Brown, R-Funiak Springs, called the situation"pathetic" in that insurers had to bet their solvency on a statefund that might not be there in full if any disaster proves to betruly catastrophic. He said it remained unclear if the fund isbacked by the full faith and credit of the state.

Rep. Brown was one of two lawmakers to vote against cat fundexpansion as a means of rate reduction, and fears regulators willmanipulate the system for the temporary relief ofpolicyholders.

Bear Stearns analyst David Small agreed thatproperty-catastrophe reinsurance rates remained relatively stablefor June 1 renewals, falling between 8 percent and 10 percent."Increased demand from reinsurance buyers offset increased supplyfollowing a no-cat event '06 and legislative moves in Florida," hewrote.

Mr. Small also wrote that one interesting harbinger of morecapacity was Allstate's recent dropping of a reinsurer rated"A-minus." An Allstate representative confirmed the carrier hasplaced secondary coverage with reinsurers who carry an A.M. Bestrating of "A-minus" but declined to say whether it has dropped anysuch coverage.

Tony Provenzale, senior vice president for Dallas-based BMSIntermediaries Inc., said not all catastrophe coverage was priceddownward.

"The turmoil that exists in post-Katrina Louisiana as well asthe failure of the Texas Legislature to provide any pre- orpost-event loss funding relief for the growing Texas WindstormInsurance Association restricted heavily coastal-exposed programsfrom enjoying the same downward trends," he said.

The largest public personal lines company also became a part ofthe trend this year to diversify its catastrophe risk exposure withsecuritization, thus providing more competition in the reinsurancemarket.

With Allstate's first hurricane-linked catastrophe bond, theinsurer joined a long list of carriers to use that mechanism forbackup reinsurance. The Willow Re Ltd. $250 million Class B Series2007-1 principal-at-risk variable-rate notes were assigned anS&P senior secured debt rating of "double-B-plus."

Proceeds from the notes, according to the company, will provideAllstate with a source of index-based collateralization reinsurancefor hurricanes in the covered area--New York, New Jersey andConnecticut--on a per-occurrence basis over a three-yearperiod.

S&P credit analyst Gary Martucci said this is the firsthurricane-linked catastrophe bond for which Allstate is thesponsor. It is also the first issuance under Willow Re's newlyestablished $2 billion principal-at-risk variable note program.

Following the carrier's record 2005 losses, Allstate undertook amajor reinsurance-buying program and cut back in the New York Citymetro area on new coverage in an attempt to ease its catastropheexposure.

Mr. Martucci said the use of catastrophe bonds by Allstate--andrecently by companies such as Chubb, Travelers and LibertyMutual--does not necessarily mean a lack of traditional reinsuranceavailability.

"It is just a way of diversifying risk at a comparable price,"he said. "And they are fully collateralized."

As for the rating of the note itself, Mr. Martucci said it wasbased on the modeled probability of attachment and the analysis ofthe deal structure.

The initial trigger amount is $1.6 billion, and the initialexhaustion amount is $2.3 billion. Boston-based catastrophe modelerAIR Worldwide will remodel the transaction each year to keep theprobability of attachment relevant to the initial probability ofattachment, while the trigger and exhaustion amounts will also bere-evaluated annually, Allstate explained.

Bryon Ehrhart, chief executive officer of Chicago-based Aon ReServices, said price declines were in the flat-to-20 percentregion. "I think if you were a customer looking to build additionalcapacity, you might have been in the flat-to-minus-10 [percent]area," he added.

Standard commercial coverage declines were capped at about 15percent, while complex coverages capped at about 10 percent,according to Mr. Ehrhart.

New catastrophe bond issuances as well as sidecars have sprungup in response to last year's shortfalls. "I don't think it isdisplacing reinsurance so much as complementing the marketplace,"he said.

New reinsurance capacity to the Florida market also came in theform of a sidecar created by Renaissance Re Holdings Ltd. StarboundReinsurance II will create about $375 million in capacity for theFlorida market, the company said.

A Renaissance Re representative said no company official couldcomment directly to National Underwriter, but Chief Executive NeilCurrie did say in a statement that he did not believe privatemarket capacity was as constrained this year compared to 2006.

At a Standard & Poor's forum last month, Mr. Currie alsosaid reinsurers' strengthened balance sheets could make them moreattractive to acquirers. "I would not be surprised if there werenot one or two combinations in Bermuda. There are good companiestrading at low prices," he said.

In the end, however, Mr. Currie said that while there may besome advantage to being larger, "it is not enough by itself to makeyou go out and do a deal."