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

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

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

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

And within that $6 billion, carriers bought more reinsurance on top of the Temporary Increase in Coverage Limit--the recently legislated optional coverage that sits above the Florida Hurricane Catastrophe Fund.

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

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

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

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

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

Jonathon Kees, a representative for the Florida Office of Insurance Regulation, said that so far reductions approved have averaged 19 percent throughout the state.

But carriers predicated their request and regulators approved them based on initial projections of cost savings, while the final tale will be told in September--when companies will factor in their actual reinsurance costs.

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

Brad Kading, president of the Association of Bermuda Insurers and Reinsurers, said primary companies did buy reinsurance out of fear 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 state fund that might not be there in full if any disaster proves to be truly catastrophic. He said it remained unclear if the fund is backed by the full faith and credit of the state.

Rep. Brown was one of two lawmakers to vote against cat fund expansion as a means of rate reduction, and fears regulators will manipulate the system for the temporary relief of policyholders.

Bear Stearns analyst David Small agreed that property-catastrophe reinsurance rates remained relatively stable for June 1 renewals, falling between 8 percent and 10 percent. "Increased demand from reinsurance buyers offset increased supply following a no-cat event '06 and legislative moves in Florida," he wrote.

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

Tony Provenzale, senior vice president for Dallas-based BMS Intermediaries Inc., said not all catastrophe coverage was priced downward.

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

The largest public personal lines company also became a part of the trend this year to diversify its catastrophe risk exposure with securitization, thus providing more competition in the reinsurance market.

With Allstate's first hurricane-linked catastrophe bond, the insurer joined a long list of carriers to use that mechanism for backup reinsurance. The Willow Re Ltd. $250 million Class B Series 2007-1 principal-at-risk variable-rate notes were assigned an S&P senior secured debt rating of "double-B-plus."

Proceeds from the notes, according to the company, will provide Allstate with a source of index-based collateralization reinsurance for hurricanes in the covered area--New York, New Jersey and Connecticut--on a per-occurrence basis over a three-year period.

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

Following the carrier's record 2005 losses, Allstate undertook a major reinsurance-buying program and cut back in the New York City metro area on new coverage in an attempt to ease its catastrophe exposure.

Mr. Martucci said the use of catastrophe bonds by Allstate--and recently by companies such as Chubb, Travelers and Liberty Mutual--does not necessarily mean a lack of traditional reinsurance availability.

"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 was based on the modeled probability of attachment and the analysis of the deal structure.

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

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

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

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

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

A Renaissance Re representative said no company official could comment directly to National Underwriter, but Chief Executive Neil Currie did say in a statement that he did not believe private market capacity was as constrained this year compared to 2006.

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

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

Special Reports /

Private Reinsurance Market Survives Florida Reforms, Cat Fund Expansion

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